BRIC dynamic conditional correlations, portfolio diversification and rebalancing after the global financial crisis of 2008-2009 (original) (raw)
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Dynamic linkages between developed and BRICS stock markets: Portfolio risk analysis
Finance Research Letters, 2017
This study examines the dynamic correlations and portfolio diversification between the major developed and BRICS stock markets. The results reveal a significant variability in the time-varying conditional correlations between these markets during upturn and downturn periods. We underline the importance of overweighting the optimal portfolios with stocks from the developed countries over those from the BRICS. Finally, we demonstrate the usefulness of using developed market stocks in the BRICS stock portfolio risk management.
Impact of Shifts in Correlation Structure on International Portfolio Diversification
Journal of Investment Management and …, 2006
Studies on international portfolio diversification in both developed and emerging countries suggest international diversification of portfolio investment is superior in terms of risk and terms of returns of a domestically formed portfolio. The more recent research has focused on the stability of the correlation structure that underpins the benefits of international portfolio diversification. The issue of whether correlation across markets for investors in Malaysian stock market (Bursa Malaysia) has shifted over time is addressed in this study. This current issue has significance for judging the benefits of international portfolio diversification. If the global stock markets are moving towards higher positive correlation over time, that would mean that the world's equity markets are becoming more integrated. The implication would be that the benefits for international portfolio diversification will be reduced. This study thus provides a time series analysis of a general trend and the shifts of correlation coefficients of internationally diversified portfolios.
2014
This chapter aims to examine the existence of dynamic linkages among the major emerging stock markets, namely Brazil, Hungary, China, Taiwan, Poland, and Turkey, as well as developed markets, particularly the US, the UK, and Germany during the period 2004-2013. Potential dynamic long-run interdependencies are investigated using Johansen and Juselius (1990) multivariate cointegration test and causal relationship through the Vector Error Correction Model (VECM). Moreover, to capture the impact of the recent global crisis on the cointegrating relationship among the developed and emerging markets, the sample period is divided into pre-and post-crisis sub periods. The empirical findings show that, after the crisis period, the direction of the long-run relationship varies, and furthermore, the stock market interdependence increases, supporting herding behavior of investors during the stock market crash period. Therefore, the increasing dynamic co-movements in the period after the crisis provide direct implications for the international investors due to potential limitation in the international risk diversification and the achievement of greater portfolio returns through global investment.
Risk spillovers and portfolio management between developed and BRICS stock markets
The North American Journal of Economics and Finance, 2017
This paper investigates spillover effects and portfolio diversification between the four major developed stock markets (USA, Europe, Japan and Asia) and five of the most important emerging stock markets known as the BRICS (Brazil, Russia, India, China and South Africa). To this end, we apply the multivariate DECO-FIEGARCH model to daily spot indices during the period 1998-2016. The results reveal a significant and asymmetric long memory process for both the developed and the BRICS markets. Moreover, we find a significant variability in the time-varying conditional correlations between the considered markets during both bull and bear markets, particularly from early 2007 to summer 2008. Additionally, we analyze the optimal portfolio weights, time-varying hedge ratios and hedging effectiveness based on the estimates of the model. The results underline the importance of overweighting the optimal portfolios with stocks from the developed countries over those from the BRICS. Finally, we assess the practical implications for mixed developed-BRICS stock portfolios, based on finding strong evidence of diversification benefits and downside risk reductions that confirm the usefulness of using developed market stocks in the BRICS stock portfolio risk management.
2014
Crisis shocks often lead to changes in the interdependence across stock markets, and thus risk assessment and management. This paper investigates the extent to which the global financial crisis of 2008-2009, which was triggered by the US subprime crisis in 2007, and the European debt crisis started at the end of 2009, affect the interdependence of the leading emerging markets of the BRICS countries with those of the United States and Europe. Our empirical analysis makes use of the FIAPARCH model combined with the Dynamic Equicorrelation (DECO-FIAPARCH), which allows for the estimation of market linkage for a large group of countries as a whole, while controlling for asymmetric volatility and long memory. The results reveal the presence of important changes in the time-varying linkages of the BRICS stock markets with the US and European ones. In particular, the average linkages have significantly been higher between 2007 and the first half of 2012 than the remaining part of the sampl...
The World Economy, 2016
In addition, global investors can design dedicated investment strategies for the BRICS markets, given those markets' common characteristics in terms of high average returns, high idiosyncratic volatility, improved market efficiency, increased liquidity, enhanced capital mobility and greater dynamic linkages with developed markets. Several past studies note that these favourable features have largely been the result of the vast stock market liberalisation reforms which have been implemented by almost all emerging markets including those of the BRICS since the early 1980s (e.g. DeSantis and Imrohoroglu, 1997; Bekaert and Harvey, 2000; Kim and Singal, 2000). Another reason that motivates our investigation of the BRICS market linkages with markets in the United States and the European region is the occurrence of the recent crises (the GFC and the European debt crisis in particular), which may have changed the behaviour of return and volatility in these markets, and in turn portfolio diversification benefits and risk management. In terms of trade, China is the second largest trading partner with the European region after the United States, accounting for 14 per cent of total trade in goods compared to 15 per cent for the United States in 2014. With respect to the United States, China stands as the third largest export market for US goods during the same year. In fact, the United States' trade in goods with China is almost nine times its trade with India. Russia also accounts for 8 per cent of total trade with the European countries. In 2013, Brazil was the 7th largest goods export market for the United States. However, the trade ties between the United States and Russia are weak. The US goods exports to Russia represents less than 0.1 per cent of the US GDP, while the US goods imports from Russia is below 0.2 per cent of the US GDP. When it comes to India, this country is a major trading partner with Germany within the European Union and has strong trade links with the United States (exports) and China (imports). Evidence of increased interdependence should be indicative of lower diversification gains but greater potential contagious effects if the external shocks are severe. Aside from the trade and market linkages, we show how our results affect risk assessment and forecasting of the stock portfolios involving the BRICS stock markets based on the Value at Risk (VaR) framework. The recent literature has examined some critical issues related to the BRICS stock markets at times of crisis, such as return and volatility behaviour, market comovement, volatility spillovers and contagion risk (e.g.
SSRN Electronic Journal, 2000
Financial liberalization has offered global investors with new investment opportunities via international portfolio diversification. Proper investment planning and portfolio diversification require well specified correlations between the assets under consideration. In this paper we apply the DCC multivariate GARCH model under the innovative concept of devolatized returns. As a case study we consider the BRICH stock markets and we try to capture potential contagion effects among the US, UK, and Europe markets. After well specifying the correlations, the efficiency of the devolatized returns is examined via portfolio considerations. The concept of devolatized returns is sound and efficient providing favorable results under all diagnostic tests.
International Portfolio Diversification and Multilateral Effects of Correlations
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Business School, UNIST for helpful comments. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peerreviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.
Opportunities for international portfolio diversification in the
2012
This paper examines long and short-run relationships among three emerging Balkan stock markets (Romania, Bulgaria and Croatia), two developed European stock markets (Germany and Greece) and United States (U.S.), during the period 2000-2005. We apply Johansen's (1988) cointegration methodology to test the long-run relationships between these markets and Granger's (1969) causality methodology in order to capture short-run cointegration. Our findings are mixed. We provide evidence on long-run relationships between the Bulgarian and Croatian stock markets and the developed markets. On the other hand, there is no any cointegration among the developed markets and the Romanian market. Moreover, there is no cointegrating relationship among the three regional emerging markets, while short-run relationships exist only among the region. These results have crucial implications for investors regarding the benefits of international portfolio diversification.
Acta Montanistica Slovaca, Vol. 25(1), 57–69. (ISI Web of Science – Sciences Citation Index® & Journal Citation Reports/Sciences Edition) (Impact factor 0.938) , 2020
This study investigates the outcomes of emerging BRICS(P) groups at the global stock market. The Emergence of this Group helps the investors in the diversification of international portfolio funds. However, economic and financial globalization assimilated the world's leading economies to provide an interdependent investment portfolio structure for investors and savings in the transformation and allocation of funds. The diversification of the international stock market may bounce the investors of BRICS(P) Group to maximize the expected returns along with a certain level of risk placement. This study prefers to use Auto-Regressive Distributed Lag (A.R.D.L.) method to evaluate the outcomes of investment diversification and to investigate the short-term and long-term changing patterns of the sampled stock exchange markets in the BRICS(P) nations. The findings of this study show that a significant investment portfolio diversification may originate benefits if the funds become merged among the B.R.I.C.S. (Brazil, Russia, India, China, and South Africa) nations. Moreover, this study made a separate point of view for the investment funds of India and Pakistan. The study investigates that the funds of these two nations are assimilated, and the appropriate diversification of investment may exist through the assimilation of these two economies. The results would suggest the international and native investors merge their investment proposals among these economies and to construct a well-diversified portfolio because a shared value of risk protects the investors. It gives opportunities to earn desirable returns. The study has implications on all sectors of the economy, including mining as well as natural resource prices.