Scientific Article · Financial Contagion
An empirical analysis of the Lehman Brothers collapse and the European sovereign debt crisis.
This research examines how international financial crises altered the relationships among BRICS equity markets and how shocks originating in advanced economies propagated into emerging-market risk. The analysis compares tranquil and crisis periods rather than assuming that cross-market dependence is structurally constant.
Research question
Did the Lehman Brothers collapse and the European sovereign debt crisis generate genuine contagion across BRICS equity markets, and how did the direction of short- and long-run dependence change during those episodes?
Method
The study applies cointegration analysis, causality tests, VECM and Gonzalo-Granger common-trend statistics, together with variance decomposition, to daily BRICS stock-market indices and external shock sources from the United States and Euro area.
Main findings
Crisis dependence
Structural change
Both short-run and long-run relationship patterns among BRICS markets change markedly during turbulent periods relative to tranquil conditions, supporting a contagion interpretation rather than simple stable interdependence.
External leadership
US + Euro area
Changes in United States and Euro-area market indices materially affect BRICS markets in the short run, acting as leading external signals during crisis transmission.
Cross-market integration
Higher in stress
The crisis episodes reveal a stronger degree of global market integration, reducing the insulation that emerging-market diversification is expected to provide.
Portfolio implication
Diversification weakens
The changing dependence structure implies that diversification benefits can deteriorate precisely when investors most need them, with direct consequences for portfolio construction and policy surveillance.
Why it matters
The paper's central message is that contagion is a regime-dependent structural change in market relationships, not simply high correlation during bad times. That distinction matters because stable diversification assumptions can fail during globally transmitted shocks, while advanced-market indices can become leading indicators for emerging-market stress.
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