Abstract
This paper investigates the relationship between the BRICs’ and the advanced economies’ stock markets from 2000 to 2016 utilizing continuous wavelet transform. The continuous wavelet transform allows us to explore these relationships in the time–frequency domain to capture short- and long-term investors’ perspectives. Bi-directional spillovers are captured in terms of returns and volatility. In addition to covering the periods of the dot.com crash, the 11 September 2001 events, the pre-2007 financialization bubble period and the resulting Global Financial Crisis, we study volatility spillovers arising from the BRIC, U.S. and European market shocks post the Global Financial Crisis. Based on our results, we confirm findings in relatively fragmented literature that document time-varying and imperfect BRIC markets’ integration with mature economies. Overall, we show that arbitrage opportunities continue to exist in international stock market portfolios with respect to BRIC assets. In a major addition to the literature, our study captures spillovers from the advanced economies’ shocks to BRIC markets, as well as contagion from BRIC markets’ shocks to advanced economies’ markets.
Highlights
Financial Management 14: 503.Since 2001, when the term ‘BRIC’ was coined by O’Neill (2001), the world’s largest middle income and emerging economies of Brazil, Russia, India and China have taken increasingly distinct paths to economic growth
We aim to study the dynamic nature of volatility contagion across the BRIC economies and the mature markets that took place during the larger-scale crises, such as the dot.com bubble, the 9/11 events, the U.S subprime mortgage crisis, the subsequent Global Financial Crisis (GFC), the European Sovereign Debt Crisis and the U.S sovereign debt downgrade
The wavelet power spectrum allows for the characterization of the spectral energy of a time series across both time and frequency
Summary
Financial Management 14: 503.Since 2001, when the term ‘BRIC’ was coined by O’Neill (2001), the world’s largest middle income and emerging economies of Brazil, Russia, India and China have taken increasingly distinct paths to economic growth. Owing significantly to the emergence of the risks of bi-directional spillovers between mature and emerging markets (Yellen 2016), BRIC markets continue to influence the global financial stability environment. On the other side of the spectrum, Russia has appeared to significantly decouple from international financial flows volatility and trends, especially the rapid deterioration in the U.S.–Russia geopolitical relations starting in 2011. While these observations are common in media and political science literature, they are yet to be examined robustly in volatility and risk spillovers literature in finance
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