Abstract
Over recent decades, the deepening of commercial and financial linkages between countries, in contrast to their expected economic opportunities and benefits, increased the frequency and intensity of propagation of negative financial shocks. The Global Financial Crisis (GFC) of 2007–2008, seemingly related only to the US real estate industry, affected a wide range of sectors as well as stock markets in developed and developing countries; the Brazilian stock market did not escape unscathed. This chapter has two main focuses. Firstly, it analyses the most important negative movements seen in the Brazilian stock market over a time span of more than 17 years. Secondly, the hypothesis of GFC transmission from financial Markets in the USA to the Brazilian stock market is econometrically tested using a DCC-GARCH model as well as Lagrange Multiplier tests . Finally, evidence is reported that favours the hypothesis of the crisis transmission to the Brazilian stock market.
Michel F. C. Haddad would like to thank CAPES (Coordination for the Improvement of Higher Education Personnel) as well as the Cambridge Trust for the financial support to develop this research.
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Notes
- 1.
“BM&F” refers to the “Brazilian Mercantile and Futures Exchange”. Moreover , the word “Bovespa” is an acronym in Portuguese for “Sao Paulo Stock Exchange”.
- 2.
CVM is an acronym in Portuguese (i.e. “Comissão de Valores Mobiliários”) for the Securities and Exchange Commission of Brazil.
- 3.
As of February 24, 2017. Source: World Federation of Exchanges (2017).
- 4.
It worth noting that despite the fact the Brazilian Stock market is almost as large as the sum of remaining Latin American stock markets in terms of market capitalisation, the Latin American stock market region as a whole is still underdeveloped in comparison with other regions. For instance, the total Latin America market capitalisation represents 2.4% of total market capitalisation worldwide (World Federation of Exchanges 2017).
- 5.
Source: International Financial Statistics (IFS).
- 6.
This average was calculated based on the Central Bank policy rate (end of each year).
- 7.
Source: B3 (2017).
- 8.
Source: Bloomberg (2017).
- 9.
See Rimkus (2016).
- 10.
The word “potential” refers to the fact that the V-shaped bust-recovery analysed in this section was performed without using an econometric technique that would test if there was a break in the respective time-series.
- 11.
This subsection describes a mere summary of relevant news released by the media at the time of the GFC. Therefore, the events described in this subsection are not exhaustive and more news can be added to that list. For more details on such events, see Zingales (2008), Arestis and Karakitsos (2013), and Rimkus (2016).
- 12.
Once more the word “potential” is used. For more details, see footnote 10 above.
- 13.
One can argue that the Ibovespa U-shaped period would be more similar to a number of “W-shaped” instead of a “U” one, due to some of its spikes within it. However, the core concern is on analysing relevant falls in the time-series (which can potentially be translated into wealth destruction) rather than showing the ideal format as well as appearance of a specific letter-shaped bust-recovery .
- 14.
The date of February 24, 2017 also refers to the end of the sample period analysed in the present subsection.
- 15.
Months in which the U-shaped bust-recovery started and ended, respectively.
- 16.
It refers to monthly indices based on nominal US dollars (World Bank, 2017).
- 17.
Brazil/US foreign exchange rate, Brazilian Reais to one US Dollar, daily, not seasonally adjusted (St. Louis Fed 2017).
- 18.
It is worth noting that it is difficult to precisely measure the impact of a problem released by the media. Table 1 lists events which potentially affected the performance of the Brazilian stock market. Due to the fact that this subsection focuses mainly on internal problems that Brazil was facing during the U-shaped bust-recovery ; this subsection does not list important news regarding external economically relevant countries, such as US, Europe, or Asia.
- 19.
Further discussion of the different forms of financial contagion and volatility spillover s can be found in Billio and Caporin (2005).
- 20.
The relation between real economic variables and the contagion phenomenon is discussed in Baur (2011).
- 21.
- 22.
Notice that for the sake of simplicity we will refer to theoretical parameters and estimates in order to provide a brief estimation context to the reader. All centred-page formulae refer to theoretical parameters unless explicitly stated otherwise.
- 23.
For all theorems and proofs, we refer the reader to Newey and McFadden (1994) for consistency and asymptotic normality of the estimators, Engle and Sheppard (2001) for the specification of first-stage score functions and, finally, to Pagan (1986) for the efficiency of two-stage estimators under iterative estimation procedures.
- 24.
Other studies which apply the same methodology to test for the absence of financial contagion are Cappiello et al. (2003) and Hesse et al. (2008).
- 25.
We refer the reader to Merton (1974)’s seminal discussion on the matter.
- 26.
It refers to Chapter 11 protection in the US Bankruptcy Court in New York.
- 27.
Complementary GARCH-DCC estimation can be found in Arruda (2012).
- 28.
Provided that the crisis developed around the US banking system, one would expect that the impact in real countercyclical assets, such as gold or other currencies, would be more relevant. However, the movement described above occurred only because the currency in question is the US dollar (i.e. the key-currency in the international monetary and financial system).
- 29.
In Panel E, the so-called TJLP, acronym for “long-term interest rate”, is highlighted, which is calculated based on the centre of the inflation target plus a risk spread.
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de Arruda, B.P., Haddad, M.F.C. (2017). The Impact of the Global Financial Crisis on the Brazilian Stock Market. In: Arestis, P., Troncoso Baltar, C., Prates, D. (eds) The Brazilian Economy since the Great Financial Crisis of 2007/2008. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-64885-9_11
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