The US financial crisis, market volatility, credit risk and stock returns in the Americas
Juan Andres Rodriguez-Nieto () and
Andre V. Mollick ()
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Juan Andres Rodriguez-Nieto: Drury University
Andre V. Mollick: University of Texas Rio Grande Valley
Financial Markets and Portfolio Management, 2021, vol. 35, issue 2, No 3, 225-254
Abstract We employ the multivariate DCC-GARCH model to identify contagion from the USA to the largest developed and emerging markets in the Americas during the US financial crisis. We analyze the dynamic conditional correlations between stock market returns, changes in the general economy’s credit risk represented by the TED spread, and changes in the US market volatility represented by the CBOE Volatility Index® (VIX). Our sample includes daily closing prices from January 1, 2002 to December 31, 2015, for the USA and stock markets in Argentina, Brazil, Canada, Chile, Colombia, Mexico, and Peru. We first identify that increases in VIX have a negative intertemporal and contemporaneous relationship with most of the stock returns, and these relationships increase significantly during the US financial crisis. We then find evidence of significant increases in contemporaneous conditional correlations between changes in the TED spread and stock returns. Increases in conditional correlations during the financial crisis are associated with financial contagion from the USA to the Americas. Our findings have policy implications and are of interest to practitioners since they illustrate that during periods of financial distress, US stock volatility and weakening credit market conditions could promote financial contagion to the Americas.
Keywords: Credit risk; Financial contagion; Latin America; Market volatility; US financial crisis; Emerging markets (search for similar items in EconPapers)
JEL-codes: F30 F65 G01 G10 G15 G40 (search for similar items in EconPapers)
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