Modeling international stock market contagion using multivariate fractionally integrated APARCH approach

The aim of this article is to examine how the dynamics of correlations between two emerging countries (Brazil and Mexico) and the US evolved from January 2003 to December 2013. The main contribution of this study is to explore whether the plunging stock market in the US, in the aftermath of global financial crisis (2007 - 2009), exerts contagion effects on emerging stock markets. To this end, we rely on a multivariate fractionally integrated asymmetric power autoregressive conditional heteroskedasticity dynamic conditional correlation framework, which accounts for long memory, power effects, leverage terms, and time-varying correlations. The empirical analysis shows a contagion effect for Brazil and Mexico during the early stages of the global financial crisis, indicating signs of "recoupling." Nevertheless, linkages show a general pattern of "decoupling" after the Lehman Brothers collapse. Furthermore, correlations between Brazil and the US are decreased from early 2009 onwards, implying that their dependence is larger in bearish than in bullish markets.