Abstract
This paper uses a statistical test based on entropy theory to propose a new way to distinguish
between interdependence, contagion, and the decoupling hypotheses in the context
of shock transmission and spillover. Applying the proposed approach, the three hypotheses
are examined when measuring the extent of shock spillover between selected developed
and emerging markets during idiosyncratic crisis and normal periods. The US and EU are
identified as developed economies. However, emerging markets are classified by regions to
determine whether their responses to shocks from developed economies are homogeneous
or heterogeneous depending on the region to which they belong. The suggested entropy test
is based on the conditional correlations obtained from an asymmetric dynamic conditional
correlation generalized autoregressive conditional heteroscedasticity (A-DCC GARCH)
model. In addition to economic methods, statistical methods based on the regime-switching
technique are used to date the different phases of the global financial crisis (GFC) and
the European sovereign debt crisis (ESDC). Our findings show that all emerging markets
decoupled from developed economies in at least one of the phases of the two crises. These
findings provide valuable insights for policymakers, investors, and asset managers for
portfolio allocation and financial regulations.