Stock market contagion across borders: Evidence from developed and emerging economies

Rinchen Dorji

doi:10.60867/00000166

This study investigates the dynamics of stock market integration, interdependence, and contagion between developed (G7) and emerging (BRICS) economies during major global crises, including the 2015 Chinese stock market crash, the 2020 COVID-19 pandemic, and the 2022 Russia-Ukraine conflict. This study addresses a gap in previous research, where limited attention has been given to how stock market linkages evolve across different investment horizons and multiple crisis periods, particularly between developed and emerging economies. The primary objective is therefore to examine how stock market linkages evolve across different investment horizons and crisis periods, and to assess their implications for diversification, systemic risk, and global financial decision-making. Specifically, the study investigates the existence of stock market contagion and time-varying co-movement in developed and emerging stock markets, and between these two groups, across short- and longrun investment horizons. Using stock market indices from major developed and emerging economies over the period 2014–2024, the study applies Johansen cointegration analysis and wavelet coherence techniques to capture both long-run equilibrium relationships and time-varying co-movements. The findings reveal that stock market interactions are neither static nor uniform. Firstly, developed markets exhibit strong and persistent long-run integration, with intensified short-run contagion during major crisis periods, particularly during major global events, leading to significant short-term synchronization and reduced diversification opportunities. Secondly, in contrast to developed stock markets, emerging stock markets display weak short-run co-movement under normal conditions and heterogeneous, often segmented long-run integration patterns, allowing for selective diversification benefits. Thirdly, cross-market analysis further shows that interactions between developed and emerging markets are uneven and highly pair-specific, with markets such as China exhibiting more fragmented and episodic co-movement. From a theoretical perspective, these findings support the distinction between interdependence and contagion and indicate the role of behavioural factors such as herding, panic-driven trading, and information asymmetry in amplifying market co-movements. Overall, the study demonstrates that global financial markets operate as time-varying and asymmetric systems shaped by structural, behavioural, and institutional forces. The findings of this research have several significant implications. For investors, diversification benefits are conditional and require dynamic, pair-specific strategies. The results highlight the need for adaptive regulatory frameworks and suggest to policymakers that differences in governance and institutional quality may influence market integration and resilience. Multinational corporations, particularly those headquartered in developed economies, may derive diversification benefits from their subsidiaries in emerging markets, although these may weaken during global crises. The study also contributes to the existing financial contagion literature by distinguishing between interdependence and contagion, while also indicating the role of behavioural factors such as herding, panic-driven trading, and information asymmetry in amplifying market co-movements. Furthermore, the findings provide a foundation for future research examining the evolving dynamics of global financial market interconnectedness under changing economic and geopolitical conditions.

Stock market contagion across borders: Evidence from developed and emerging economies

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