The Contagion Effects on Real Economy: Emerging Markets during the Recent Crises

In this paper, we analyze financial contagion in the emerging markets both at the aggregate and disaggregate levels during the global financial crisis (GFC) and the European sovereign debt crisis (ESDC). By using a market model derived from Bakaert et al. (2005) and Baur (2012), we investigate the possible propagation channels of financial contagion as follows: i) aggregate stock market contagion, ii) financial sector contagion, iii) real economy sector contagion from the financial system of the crisis- originating country and iv) idiosyncratic contagion effects to the real economy sectors transmitted through the emerging financial market. At the aggregate level, our results document contagion incidences only during the ESDC. At the sector level, the energy, the materials and the industrial sectors are exposed to financial contagion from the European financial market in the episode of the ESDC. With regard to the idiosyncratic contagion effects, the real economy sectors are heterogeneous in the sense that they display co-movements at varying magnitudes during both of the crises. However, the healthcare sector is found to be vulnerable to financial system shocks within the emerging markets during both turmoil episodes. In this context, our results are of particular importance for the international investors in order to design a well-diversified portfolio, as well as for the authorities to maintain global financial stability and to prevent and mitigate the financial contagion.