Impact of Financial Crisis in SANE Economies: Test for Contagion
By
ACKNOWLEDGEMENT
I would first like to express my gratitude for my research supervisor, colleagues, and peers and family whose immense and constant support has been a source of continuous guidance and inspiration.
DECLARATION
I hereby certify that the work described in this thesis is my own work, except where otherwise acknowledged, and has not been submitted previously for a degree at this or any other university.
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TABLE OF CONTENTS
ACKNOWLEDGEMENT2
DECLARATION3
ABSTRACT5
CHAPTER 1: INTRODUCTION6
CHAPTER 2: LITERATURE REVIEW11
Overview of Sane Economies14
Africa is the world's football largest and14
Relative Importance of the Sane Economies14
Key Economic Indicators15
Impact on SANE Economies17
Algeria17
Nigeria18
Egypt19
Sector of tourism20
Navigation in Suez Canal21
Oil sector21
Foreign direct investments22
Growth rate slowdown22
South Africa23
SANE Economies Reform Analysis24
The banking sector24
Stock Market25
CHAPTER 3: METHODOLOGY: TIME-VARYING CONDITIONAL COPULA AND AG-DCC-GARCH MODEL27
Conditional copula27
Regime Switches in Copula28
Estimation of parameters and models for marginal distributions29
The measurement of the dependence parameter30
AG-DCC-GARCH model31
Data32
CHAPTER 4: EMPIRICAL RESULTS34
Conditional Copula Estimates34
Estimates of the AG-DCC-GARCH model44
CHAPTER 5: CONCLUSION54
REFERENCES56
ABSTRACT
This paper investigates financial contagion in a multivariate time-varying asymmetric framework, focusing on four emerging equity markets, namely Egypt, Algeria, Nigeria, South Africa (SANE) and two developed markets (U.S. and U.K.), during five recent financial crises. Specifically, both a multivariate regime-switching Gaussian copula model and the asymmetric generalized dynamic conditional correlation (AG-DCC) approach are used to capture non-linear correlation dynamics during the period 1995-2006. The empirical evidence confirms a contagion effect from the crisis country to all others, for each of the examined financial crises. The results also suggest that emerging SANE markets are more prone to financial contagion, while the industry-specific turmoil has a larger impact than country-specific crises. Our findings imply that policy responses to a crisis are unlikely to prevent the spread among countries, making fewer domestic risks internationally diversifiable when it is most desirable.
CHAPTER 1: INTRODUCTION
The global extent of recent crises and the potential damaging consequences of being affected by contagion continuously attract attention among economists and policymakers. The transmission of shocks to other countries and the cross-countries correlations, beyond any fundamental link, has long been an issue of interest to academics, fund managers and traders, as it has important implications for portfolio allocation and asset pricing. Generally, contagion refers to the spread of financial disturbances from one country to others. The literature on financial contagion literally exploded since the thought-provoking paper by Forbes and Rigobon (2002) started circulating in the late 1990s. They define contagion as “a significant increase in cross-market linkages after a shock to one country (or group of countries)”, otherwise, a continued market correlation at high levels is considered to be “no contagion, only interdependence”. Since then, the existence of financial contagion has been studied by many researchers, mainly around the notion of “correlation breakdown” (a statistically significant increase in correlation during the crash period).1 For example, King and Wadhwani (1990) find evidence of an increase in stock returns' correlation in 1987 crash. Calvo and Reinhart (1996)report correlation shifts during the Mexican Crisis, while Baig and Goldfajn (1999) support the contagion phenomenon during the East Asian Crisis. Hon et al. (2007) find that technology bubble collapse in the ...