Correlations among Emerging and Developed Equity Markets

High volatility observed across certain markets led to leading indices moving abruptly over time. A look at the movements of different indices for the past one year revealed that markets were increasing getting interlinked and as a result major developments in one market were increasingly getting transmitted to others. This led to the inspiration in undertaking a study to see whether there is any linkage/interlinkage between developed and emerging markets and if yes, the extent of the same. An attempt is made to study the movements in global equity markets consisting of developed and emerging ones for the last one year. Analysis is done by studying the nature of return, volatility and correlation coefficients of returns between developed and emerging markets for this purpose.

Results showed that after the eruption of crisis at the epicenter US, there was an increasing spillover effect which engulfed both developed and emerging markets as evident from the above return, volatility and correlation analysis. The crisis which accentuated post the collapse of Lehman brothers during Sep. 2008 rapidly snowballed into an avalanche plunging equity markets across the globe through debilitating negative returns with sudden sharp spikes in volatility. As a fallout, correlations in returns between developed and emerging markets increased indicating high inter-linkages within equity markets.