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.
The modern-day financial market has undergone tremendous change due to the rapid nature of growing challenges and subsequent supervision it faces in the contemporary world (Hassan et al., 2020; Baglioni et al., 2019; Fabris, 2018; Leuz, 2018). It can be stated without any doubt that COVID, as a health-driven medical crisis, has fundamentally influenced the basic concept of modern-day investment (Meher et al., 2020; Kinateder et al., 2021). Previously, the Western financial superpowers dominated the financial market and system (Armijo et al., 2020). However, emerging markets and the corresponding ecosystem have played a significant role in recent times, especially in the aftermath of the COVID (Ahmed et al., 2017; ElBannan, 2020; Jeon and Wu, 2020). Unlike the global financial crisis (GFC), COVID has some fundamentally different impacts on the emerging market, as suggested by other authors. In most cases, the emerging markets are producing a better recovery than their western counterparts (Akhtaruzzaman et al., 2021) and adding up the impact of China and India (Blarel, 2012; Dharani et al., 2022; Liu et al., 2019; Wu, 2019). It has never been more critical to understand the impact of the emerging nations' financial outlook in the scope of modern-day crises (GFC and COVID).
GFC and COVID, at a very core, restricted our fundamental understanding of the financial market stability and connectedness. After the GFC, many financial experts predicted that this is low, and there is no chance of having a lower point. However, COVID has proved them wrong. What started as a medical crisis now has converted into a full-blown financial meltdown, especially in the financial sector. As a core of the financial sector, the banking sector is not above the impact, especially in emerging banks. Emerging market banks have defining characteristics compared to the rest of the world, where they must play a significant role in local economic sustainability. Thus, how they impact and work together plays a significant role in their performance. From that point of view, our paper is the first paper that has looked at the spill over behaviour between the emerging market banking sectors and compared the GFC vs COVID relationship among them in different time horizons. From an investor's point of view, it opens many avenues of a safe investment. Even in the short term, there might be some changes in the pattern of pairwise correlation, especially with PIIGS; both cases are the same in the long term. This suggests that all crises will similarly impact the emerging market banking sector, especially in the medium to long term. The results obtained in the study have severe implications for the governments, policymakers, and portfolio managers in the selected emerging markets. To manage the risk accurately, portfolio managers need to access the covariance between different markets correctly. This makes the DCC values obtained in the study more appealing because it forecasts the covariation between the different emerging markets studies in the paper.