Transmission of the subprime crisis: Evidence from industrial and financial sectors of BRIC countries

Abstract

Although, there is an apparent consensus about the contagion effects of the current US subprime crisis. However, the transmission and repercussions of US subprime crisis, as well as the nature of the transformation suffered by different economic sectors between the US and other markets are such empirical questions that have not been dealt with comprehensively, yet. In this paper, by utilizing the multivariate GARCH analysis of Engle and Kroner (1995) for which a BEKK representation is adopted, we examine the transmission of the US subprime crisis across BRIC financial markets.Moreover, to identify the extent of contagion, we also inspect the diffusion of US subprime crisis to BRIC equity market’s financial and industrial sectors. We found interesting evidence of volatility spillovers from US financial sector to all the BRIC market’s financial sectors both in the full sample and crisis period. Similarly, except Chinese industrial sector, we observe contagion effects from US to Brazilian, Russian and Indian equity market’s industrial sectors. Our results exhibit direct linkage for both returns and volatility between the US equity market and the BRIC markets. Equity markets of Russia and India, however, were found hardly hit during the crisis period among the BRIC countries. Finally, we found no support for the decoupling view while investigating the fastest growing emerging markets, the BRIC countries.