International Linkage of Russian Market and Russian Financial Crisis : A Multivariate Garch Analysis

The purpose of this study is two fold. First we look at the international linkage of Russian equity market and second we examine the international transmission of the 1998 Russian financial crisis. We estimate a bivariate GARCH-BEKK model proposed by Engle and Kroner (1995). Four pair-wise models are estimated for Russia with USA, European Union, Emerging Europe and Asia by using daily total return indices. We find evidence of direct linkage between Russian equity market, both in regards of returns and volatility, with all other markets. However the linkage is week, indicating partial integration of Russian market into the world market. While analyzing the contagion effects of Russian Financial crisis 1998, three subsets are examined, pre crisis (1994-1998), during crisis (Aug.1998-Dec.1998) and post crisis (1999-2007). Volatility spillovers are found in all cases, though the dynamics of the conditional volatilities differ. USA and Emerging Europe exhibit bidirectional while European Union and Asia display unidirectional linkage in pre crisis sample. Whereas, after the crisis period shows bidirectional connection with USA and Asia while unidirectional ties with Emerging Europe. Surprisingly, no statistically significant relations were found between Russian equity market and the equity markets of European Union in post crisis sample. Finally, highly significant but negative shocks and volatility spillovers were observed from Russia to all other markets during the crisis period, indicating clear evidences of crisis contagion