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Commentary analyzes bank correlation trends across emerging markets during Covid-19 compared to GFC, revealing key similarities and differences.
The emerging-market banking sector plays a significant role in modern-day banking sector stability. In this study, we have used the dynamic conditional correlation (DCC) version of the Generalised autoregressive conditional heteroscedasticity (GARCH) model to estimate the correlation among Emerging Markets (BANKSEK), Latin America (BANKSLA), Brazil, Russia, India, and China (BRIC) (BANKSBC), Portugal, Ireland, Italy, Greece, and Spain (PIIGS) (BANKSPI) and Far East (BANKSFE). The study covers more than 100, 200 and 300 trading days of the GFC (starting July 8, 2008) and the COVID-19 pandemic (starting January 1, 2020). We have found that generally, in the short-term excluding PIIGS, all banks show similar pairwise correlation, and the pattern holds in the medium and long term. The far east banking sector displays a reduced correlation than their counterparts, even following the same pattern.
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Rabbani et al. (2022) studied this question.
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