Fear Linkages Between the US and BRICS Stock Markets: A Frequency-Domain Causality

Abstract

We employ a spectral causality approach to uncover short-, medium-, and long-run causal relations between the US implied volatility index and the five individual implied volatility indexes of BRICS markets from 16th March 2011 to 31st January 2018. We show that the volatility causal relations differ between the short and long run in many cases. Although the results indicate the dominant role played by US uncertainty in shaping uncertainty in all BRICS markets, there is also evidence of a feedback effect from Brazil, Russia, and China to the US that differs across the spectrum. The implications for hedging and risk management practices are explored.