Contagion testing in frontier markets under alternative stressful S&P 500 market scenarios

Mahadeo, S. M. R. ORCID: https://orcid.org/0000-0001-8576-5755, Heinlein, R. and Legrenzi, G. D. (2022) Contagion testing in frontier markets under alternative stressful S&P 500 market scenarios. The North American Journal of Economics and Finance, 60. 101629. ISSN 1879-0860 doi: 10.1016/j.najef.2021.101629

Abstract/Summary

We use alternative approaches to identify stable and stressful scenarios in the S&P 500 market, to offer a new perspective for constructing contagion tests in recipient frontier markets vulnerable to disturbances from this source market. The S&P 500 market is decomposed into discrete conditions of: (1) tranquil versus turbulent volatility; (2) bull versus bear market phases; (3) normal periods versus asset bubbles and crashes. Based on these identified scenarios, we use various co-moment contagion tests to analyse the changing relationship between the S&P 500 market and major frontier markets in the Caribbean region that have prominent trade related exposure to the US. Our findings show that, outside of the events of the Great Recession, the Caribbean stock exchanges are largely independent of the S&P 500 market.