The US financial crisis, market volatility, credit risk and stock returns in the Americas
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The US financial crisis, market volatility, credit risk and stock returns in the Americas Juan Andres Rodriguez-Nieto1
· Andre V. Mollick2
Accepted: 10 October 2020 © Swiss Society for Financial Market Research 2020
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 JEL Classification F65 · F30 · G01 · G10 · G15 · G40
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Juan Andres Rodriguez-Nieto [email protected] Andre V. Mollick [email protected]
1
Breech School of Business Administration, Drury University, 900 North Benton Avenue, Springfield, MO 65802, USA
2
Economics and Finance, Robert C. Vackar College of Business and Entrepreneurship, University of Texas Rio Grande Valley, 1201 West University Dr., Edinburg, TX 78539-2909, USA
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J. A. Rodriguez-Nieto, A. V. Mollick
1 Introduction The 2008–2009 US financial crisis, which was identified by the US National Bureau of Economic Research (NBER) as having started after the peak of economic expansion in December 2007 and officially ending by the end of June 2009, was the most significant US market capitalization decline since the Great Depression. The US equity markets, represented by the Standard and Poor’s 500 index (S&P 500), had a capital loss of approximately 40% during the crisis period (using data downloaded from DataStream), and other financial markets followed. Growing cross-market collaborations and interdependence, greater investor access to international markets, and overall market globalization may have fueled the financial contagion from the USA to other financial markets as witnessed by the fact that during that period, Canada and the emerging countries in Latin America followed suit.
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