Government intervention in Russian bourse: a case of financial contagion

Abstract

Purpose

In September‐October 2008 the Russian stock markets came under severe strain amidst the global financial crisis. During this time the Russian government intervened several times to halt the trade to impede the continuous slide. The government justified its actions owing to the argument that the crisis was due to a trickledown effect from the financial crisis in the USA and the other developed markets. The purpose of this paper is to put to test the government's claim by exploring the level of integration between Russia and the USA and European equity markets.

Design/methodology/approach

The study employs Markov Regime Switching Model for tracking structural breaks in the time series. This method divides the data into three periods, i.e. pre crisis, during crisis and post crisis. Next the Multivariate GARCH‐DCC model technique is used to establish the time varying linkages in order to verify the contagion effect. In the final step the Markowitz mean‐variance framework is used to position each individual index portfolio with respect to the efficient frontier to analyze the impact of crisis as well as Russian government intervention.

Findings

The findings suggest that the Russian equity market is weakly integrated with US and strongly integrated with European markets. The results correspond to the underlying financial and economic linkages between Russia, the US and Europe. When examined in a portfolio setup, the results show sudden fall in correlation among the Russian, US and European equity markets suggesting weak linkages among these markets. Finally, the Markowitz Efficient frontier indicates dramatic rise in volatility on the day intervention began and ended which signifies the increased uncertainty among the investors owing to Russian government ad hoc interventions.

Originality/value

The paper attempts to examine the Russian government intervention in the backdrop of financial crisis 2008 and concludes that the government intervention essentially increased the uncertainty in the local as well as international markets. Therefore, it is essential that the government should avoid direct intervention in its stock market.

Citation

Khan, S. and Batteau, P. (2012), "Government intervention in Russian bourse: a case of financial contagion", Journal of Financial Economic Policy, Vol. 4 No. 4, pp. 320-339. https://doi.org/10.1108/17576381211279299