The Contagion Effect of the Subprime Crisis in the Brazilian Stock Market

Oscillations in the financial market during the subprime crisis brought about a rise in volatility and fall of the prices of assets, in addition to increasing the degree of common movements among markets. This paper surveyed the contagion effect of the international financial crisis on the indices of Brazil's stock market, from the study of the pattern of alterations of the correlations estimated between indices of Brazilian and American stock market. The empirical analysis was based on the multivariate GARCH - BEKK models. The results showed that the structure of the estimated correlations between the years 2007 and 2010, showed clear evidence of contagion in the indices at issue. In the period of the international financial crisis, there was an increase of the correlation between the indices of the U.S. and Brazilian markets, such a result being corroborated by the structural break test. The Financial Index presented the greatest percent rise in the correlation between the pre - crisis and crisis periods, reflecting the scarcity of domestic and foreign credit during the period of financial instability.