Further evidence on co-movement between equity funds and business cycle variables in BRICS: A Wavelet analysis

Abstract

There is only a limited amount of research that addresses questions pertaining to the relationship between the asset management sector and the economy. This paper focuses on this relationship and addresses the question of whether the asset management sector provides information about future economic conditions. The study examines the co-movement between equity mutual funds and business cycle variables in the BRICS (Brazil, Russia, India, China and South Africa) economies over the period of 2000–2019. Using daily data of 9005 active asset management firms, the study utilizes Wavelets at multiple time horizons (Multiresolution) and Granger coherence approaches. Our findings suggest that equity funds lead against key macroeconomic variables including credit default swap spread, Treasury bill and exchange rate for most of the sample countries (Russia, China, and South Africa) and that interactions among variables are diverse in nature. The Granger coherence results are important for samples from India and China, where the long run constituents possess forecasting ability. In the case of both India and Brazil, the equity funds have a lagged relationship with credit default swap spread, Treasury bill and exchange rate. The findings underscore the importance of portfolio diversification and hedging strategies for market players and policymakers in order to avoid economic turmoil.