Causal interactions and financial contagion among the BRICS stock markets under rare events: a Liang causality analysis

Xunfa Lu, Jingjing Sun, Guo Wei and Ching-Ter Chang

International Journal of Emerging Markets, 2023, vol. 20, issue 5, 2014-2041

Abstract: Purpose - The purpose of this paper is to investigate dynamics of causal interactions and financial risk contagion among BRICS stock markets under rare events. Design/methodology/approach - Two methods are adopted: The new causal inference technique, namely, the Liang causality analysis based on information flow theory and the dynamic causal index (DCI) are used to measure the financial risk contagion. Findings - The causal relationships among the BRICS stock markets estimated by the Liang causality analysis are significantly stronger in the mid-periods of rare events than in the pre- and post-periods. Moreover, different rare events have heterogeneous effects on the causal relationships. Notably, under rare events, there is almost no significant Liang's causality between the Chinese and other four stock markets, except for a few moments, indicating that the former can provide a relatively safe haven within the BRICS. According to the DCIs, the causal linkages have significantly increased during rare events, implying that their connectivity becomes stronger under extreme conditions. Practical implications - The obtained results not only provide important implications for investors to reasonably allocate regional financial assets, but also yield some suggestions for policymakers and financial regulators in effective supervision, especially in extreme environments. Originality/value - This paper uses the Liang causality analysis to construct the causal networks among BRICS stock indices and characterize their causal linkages. Furthermore, the DCI derived from the causal networks is applied to measure the financial risk contagion of the BRICS countries under three rare events.

Keywords: Financial systems; Financial risk and risk management; Liang causality analysis; Financial contagion; Emerging markets (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eme:ijoemp:ijoem-01-2023-0055

DOI: 10.1108/IJOEM-01-2023-0055

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