Heterogeneous dependence and dynamic hedging between sectors of BRIC and global markets

Abstract

This study examines the dynamic dependence structure via return and volatility spillovers between BRIC (Brazil, Russia, India, and China) and global markets (USA, Europe, and World) at sectoral level. Using directional spillover and dynamic conditional correlation models, we find that there is substantial evidence of heterogeneity across sample sectors within BRIC and between BRIC and global indices. The sectors that exhibit high inter-country spillovers are industrial metal & mining, banking, industrial transportation and oil & gas. The regional and global indices represented by Europe and World show better spillover mechanism than any other indices, implying that these global sectoral indices impact the sectoral indices returns of BRIC markets. The dynamic hedge ratios and portfolio weights suggest that among BRIC, the sectoral indices of China and India provide better opportunities for risk management than Brazil and Russia. We thus conclude that the heterogeneous dependence structure makes BRIC as a diverse asset class from strategic asset allocation perspective.