Stock market interlinkages among the BRIC economies

Shalini Aggarwal and Abhay Raja

International Journal of Ethics and Systems, 2018, vol. 35, issue 1, 59-74

Abstract: Purpose - This paper aims to study the co-integration among the stock markets of BRIC nations of Brazil, Russia, Indian and China to analyze if the series move apart or they move together in the long term. and to examine the implied volatility transmission between the Indian implied volatility index and three international indices and vice-versa by using synchronized daily data by using techniques such as generalized impulse response functions and variance decompositions. More specifically, the authors investigate how shock to one volatility index affects another volatility index and what is the magnitude and sign of affect and how long does the effect persist? Design/methodology/approach - Unit root tests are conducted to determine the order of integration for each index. The cointegration analysis is used to evaluate the co-movement of a long-term equilibrium relationship among the four stock market indices. Variance decomposition test helps to explain that how much movement in the dependent variable is explained due to its own shock vis-a-vis to the shock of other variables under the study. Impulse response function is used to find out the impact of the standard deviation of shock given to one variable on the impact on the other variable. Findings - There exists one long-run cointegrating relationship between the four stock markets under study. The coefficient of VECM is −0.00031 which is negative and highly significant at 1 per cent. This confirms the existence of a stable long-run causal relationship between the variables. Variance decomposition shows that indices of Brazil, China and Russia can explain on average 4, 0.5 and 5 per cent, respectively, of the forecast error variance of Indian index. On the other hand, Indian market can explain on an average 6.7, 5 and 3 per cent of the forecast error of Brazilian, Chinese and Russian markets, respectively. Originality/value - The research paper is an original work of the author.

Keywords: BRIC; Impulse response; Vector error correction model; Johansen cointegration; G1; G15; N25 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eme:ijoesp:ijoes-04-2018-0064

DOI: 10.1108/IJOES-04-2018-0064

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