Do US policy uncertainty, leveraging costs and global risk aversion impact emerging market equities? An application of bounds testing approach to the BRICS

Ebaad Momin and Abul Masih

MPRA Paper from University Library of Munich, Germany

Abstract: ‘When the United States sneezes, the world catches a cold. And when America recovers, the planet has a spring in its step’ – For decades together, this metaphor has seemed an accurate description of the global economy. Through this paper we have tried to examine the short and long term dependence structure between the stock markets of emerging markets and influential global factors (US economic policy uncertainty, the global risk aversion and the cheap borrowing costs in the US) using the BRICS countries (Brazil, Russia, India, China and South Africa) as a case study. The study applies the ‘Auto-Regressive Distributed Lag’ (ARDL) technique (Pesaran, Shin, &Smith, Journal of Applied Econometrics, 2001) which has taken care of a major limitation of the conventional cointegrating tests, in that they suffer from the pre test biases. Based on the above rigorous methodology, our evidence tends to suggest that although there have been studies which indicate the impact of the disturbances stemming from the developed world, in the long- run there is a limited impact of these on the BRICS equity markets. These findings are plausible and have strong policy implications for portfolio investing and diversifications by investing in the emerging markets as the BRICS equities could function as a hedge against negative shocks from the developed economies.

Keywords: US Policy Uncertainty; Risk Aversion; Leverage; Emerging Market Equities; BRICS (search for similar items in EconPapers)
JEL-codes: C22 C58 E44 (search for similar items in EconPapers)
Date: 2015-06-18
New Economics Papers: this item is included in nep-cis and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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