Dynamic global linkages of the BRICS stock markets with the U.S. and Europe under external crisis shocks: Implications for portfolio risk forecasting (original) (raw)
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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.
The emerging market crisis and stock market linkages: further evidence
Journal of Applied Econometrics, 2006
This study examines the long-run price relationship and the dynamic price transmission among the USA, Germany, and four major Eastern European emerging stock markets, with particular attention to the impact of the 1998 Russian financial crisis. The results show that both the long-run price relationship and the dynamic price transmission were strengthened among these markets after the crisis. The influence of Germany became noticeable on all the Eastern European markets only after the crisis but not before the crisis. We also conduct a rolling generalized VAR analysis to confirm the robustness of the main findings. further argue that (short-term) correlation between national stock market returns only increases temporarily in times of general market turbulence such as the 1987 crash. On the other hand, report some evidence for strengthened international stock market linkages after the 1987 crash in terms of an increased number of co-integrating vectors in the post-crash period compared to the pre-crash period.
Global financial crisis and spillover effects among the U.S. and BRICS stock markets
International Review of Economics & Finance, 2016
Global financial crisis and spillover effects among the U.S. and BRICS stock markets Abstract. This article examines the spillover effect between the U.S. market and five of the most important emerging stock markets namely the BRICS (Brazil, Russia, India, China and South Africa), and draws implications for portfolio risk modeling and forecasting. It gives consideration to periods before and after the recent global financial crisis (GFC). To this end, the bivariate DCC-FIAPARCH model, the modified ICSS algorithm and the Value-at-Risk (VaR) are employed to capture volatility spillovers, detect potential structural breaks and assess the portfolio market risks. Using the U.S. and the BRICS daily spot market indices for the period from September 1997 to October 2013, our empirical results show strong evidence of asymmetry and long memory in the conditional volatility and significant dynamic correlations between the U.S. and the BRICS stock markets. Moreover, we find several sudden changes in these markets with a common break date centered on September 15, 2008 which corresponds to the Lehman Brothers collapse. The Brazil, India, China and South Africa markets are strongly affected by the GFC, supporting the hypothesis of recoupling (with increased linkages). In contrast, the hypothesis of decoupling is supported for the Russian stock markets only. Finally, the skewed Student-t FIAPARCH models outperform and provide more accurate in-sample estimates and out-of-sample forecasts of VaR than the normal and Student-t FIAPARCH models in almost all cases. These results provide helpful information to financial risk managers, regulators and portfolio investors to determine the diversification benefits among these markets.
Dynamic Linkages between Brics and Other Emerging Equity Markets
Theoretical Economics Letters
In this paper, we analyze dynamic interactions between stock markets of BRICS (Brazil, Russia, India, China and South Africa) and other select emerging economies as classified by IMF [1] from January 2001 to June 2017. We employ ADCC-EGARCH model as well as block aggregation technique as suggested by Diebold-Yilmaz [2] framework and order-invariance of GVDs (Generalized Variance Decompositions) as developed by Greenwood-Nimmo, Nguyen, & Rafferty [3] to examine return and risk spillovers within as well as across the BRICS and other sample Emerging Market Economies (EMEs). The results suggest the cohesiveness within BRICS equity markets is moderate. Our results also show increased integration amongst BRICS economies during the global financial crisis period, implying the presence of Contagion effect. Furthermore, Mexico, Chile, Hungary, Turkey and Poland seem to be good candidates to be included along with BRICS for forming a larger Emerging market economic block. This expanded block will not only ensure strengthening trade and financial ties among the participating countries, but also provide a better balance between the emerging and the developed world. This paper contributes immensely to the literature on international finance dealing with financial integration, particularly for emerging markets. The study provides important implications for global policy makers, international economic agencies, investors and the academic community.
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.
Global financial crisis and emerging stock market contagion: A multivariate FIAPARCH–DCC approach
International Review of Financial Analysis, 2013
This paper empirically investigates the contagion effects of the global financial crisis in a multivariate Fractionally Integrated Asymmetric Power ARCH (FIAPARCH) dynamic conditional correlation (DCC) framework during the period 1997-2012. We focus on five most important emerging equity markets, namely Brazil, Russia, India, China and South Africa (BRICS), as well as USA during different phases of the crisis. The length and the phases of the crisis are identified based on both an economic and a statistical approach. The empirical evidence does not confirm a contagion effect for most BRICS during the early stages of the crisis, indicating signs of isolation or decoupling. However, linkages reemerged (recoupled) after the Lehman Brothers collapse, suggesting a shift on investors' risk appetite. Moreover, correlations among all BRICS and USA are increased from early 2009 onwards, implying that their dependence is larger in bullish than in bearish markets. These findings do not show a pattern of contagion for all BRICSs' markets that could be attributed to their common trade and financial characteristics and provide important implications for international investors and policymakers.
Stock Market Linkages: Evidence From The US, China And India During The Subprime Crisis
Timisoara Journal of Economics and Business, 2015
The Subprime crisis spillovered the returns and volatility from the US stock market to the other integrated economies. The present study attempts to analyze the stock market linkages between the US, India and China, especially during the US subprime Crisis. The technique of Tri-Variate Vector Autoregression and the Spillover Index has been employed so as to analyze the relations during the time period 2007 to 2009. To estimate the time varying risk parameters, the technique of Threshold Generalized Autoregressive Conditional Heteroskedastic [TGARCH (1,1)] model has been used. A uni-directional causality has been observed from the US market to the Indian and Chinese market, whereas another unidirectional causality has also been spotted running from the Chinese market to the Indian market in the context of stock market returns during the crisis period. A unidirectional volatility spillover from the US to the Indian market and from the Indian to the Chinese market has been found to be ...
Journal of Economics and Financial Analysis, 2018
This research analyzes and extends the study of contagion for BRICS emerging stock markets in the context of the last two international financial crises: the Lehman Brothers Bankruptcy Crisis and the European Sovereign Debt Crisis. We investigate changes in the relationship and the co-movements between BRICS markets in response to international shocks that are originated in advanced markets like USA and Europe. Employing data of daily stock market indices of BRICS countries, this research tests for contagion, examining the interactions and characteristics of price movements of BRICS stock markets by applying cointegration, causality and VECM/Gonzalo-Granger statistic and variance decomposition methodology on stock returns as a measure of perceived country risk. The results exhibit that both long-run and short-run relationships patterns exist between BRICS stock markets and have drastically changed during turbulent periods compared with tranquil period, pointing towards the occurrence of contagion phenomenon among BRICS markets during the last two crises. These findings also indicate that changes in the USA and the Euro Zone indices affect BRICS stock markets in the short-run, acting as a leading indicator for investing in BRICS markets. Also imply an increasing degree of global market integration, bringing major implications for portfolio diversification and policy makers.
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