Contents lists available at ScienceDirect Economic Modelling journal homepage: www.elsevier.com/locate/econmod Regional spillovers across transitioning emerging and frontier equity markets: A multi-time scale wavelet analysis ☆ Ginanjar Dewandaru a , Rumi Masih b , Mansur Masih a, ⁎ a INCEIF, The Global University of Islamic Finance, Lorong University A, 59100 Kuala Lumpur, Malaysia b FML Reliance, New York, NY,10022, USA ARTICLE INFO JEL classification codes: C22 C58 E44 G15 Keywords: Contagion Integration Middle East and South African stock markets Wavelets ABSTRACT The episodic wave of crises experienced across the global financial markets over the past two decades has raised questions surrounding the vulnerability of transitioning emerging and frontier equity markets to exogenous shocks. These markets, by design, have lacked the institutional or financial architecture supporting their capital base compared to more established markets. We make the initial attempt to examine four such stock markets (Saudi Arabia, UAE, South Africa and Israel). We perform multi-timescale analysis using wavelet-based time and frequency decompositions in order to investigate (i) whether the shocks transmitted were pure contagion or fundamental-based and (ii) also whether the dynamic evolution of stock market integration was mainly short- term or long-term. We find that prior to the 2008/09 US subprime crisis, the shocks generated pure contagion in contrast to the subprime crisis that reveals evidence supportive of fundamental-based contagion. Further, when exploring the dynamics of market integration, we find that integration strengthens over time as opposed to any immediate short-term outcome. This supports policies engendered to promote stock market resiliency and stability. 1. Introduction The shock transmission across countries during financial crises has been an issue of great interest and recently generated a heated policy debate among market participants, central bankers, and governments, as to whether financial shocks in one country can have rapid and large impacts on other countries. Recently, the remarkable US born sub- prime crisis of 2008-09 that considerably hit the markets all over the world has raised a critical question on the capacity of the global financial system to maintain its financial stability in a meaningful way. The major interest has been its amplification which started out in the floating-rate segment of the US sub-prime mortgage market. Even emerging markets were not spared, with an example of the global crisis impact on the Asian region, 1 which implies that the Asian region still absorbed indirect effects due to the deepening global financial integra- tion (Zhang et al., 2010). The findings on this particular issue may indicate the impact on the policy makers as to whether they are better off in liberalizing their financial markets (Furman and Stiglitz, 1998; Radelet and Sachs, 1998), which is recognized as a source of financial sector development. When we look at studies focusing on the Middle East region, Neaime (2012) has empirically highlighted the impact of the recent subprime crisis on the emerging MENA equity markets. He argues that the transmission of external shocks into MENA countries can be attributed to their higher overall trade openness and their mismanage- ment in terms of domestic financial and macroeconomic policies. In addition, Beirne et al. (2010) also argue that regional spillovers have dominated in Latin America and Middle East, while Asia is more exposed to global spillovers. Middle East as a region also represents some markets that represent frontier equity markets. In this study, frontier market refers to the emerging countries that over the last decade experienced a rapid growth with respect to financial market development within the region. The increasing volume, turnover, and market capitalization signal the growth in stock market development, which attract the interest of foreign investors. The significant growth in Middle East such as, Saudi Arabia and UAE has been strongly driven by http://dx.doi.org/10.1016/j.econmod.2017.04.026 Received 29 June 2016; Received in revised form 23 April 2017; Accepted 29 April 2017 ☆ The authors are deeply grateful to the editor (Professor Sushanta Mallick) and the anonymous reviewers for their very helpful comments which enhanced the quality of the paper greatly. ⁎ Corresponding author. E-mail address: mansurmasih@gmail.com (M. Masih). 1 The credit spreads in Asia, with lower exposures to US sub-prime mortgages, noticeably increased along with those in the United States and Europe (Brana and Lahet, 2010). Valuation losses on CDS in Asia had soared mainly due to global and region-specific risk pricing factors as well as revisions to expected losses from defaults (Kim et al. (2010). The Asian interbank markets were also affected by the distress in the US dollar market (Yu and Fung, 2009) Economic Modelling xxx (xxxx) xxx–xxx 0264-9993/ © 2017 Elsevier B.V. All rights reserved. Please cite this article as: Dewandaru, G., Economic Modelling (2017), http://dx.doi.org/10.1016/j.econmod.2017.04.026