International Portfolio Diversification Possibilities: Could BRICS become a Destination for G7 Invesments

Lei Pan and Vinod Mishra

No 11-18, Monash Economics Working Papers from Monash University, Department of Economics

Abstract: We investigate the diversification possibilities between BRICS and G7 stock markets. Our theoretical model suggests that risk-averse investors are diversifying internationally. The findings of cointegration test with multiple structural breaks reveal that apart from China and India, the remaining BRICS equity markets can be a potential diversification destination over the long term. The full sample bootstrap Granger causality tests results imply that G7 stock markets have predictive power for most BRICS stock markets. Both the long-run and shortrun parametric stability tests suggest that the full sample parameters are unstable hence unreliable The bootstrap rolling window estimations outline the causalities between stock markets are increasing during the crisis periods and vary over different sub-samples. Overall, our causality findings suggest that the short-term diversification possibilities are extremely limited. Finally, we analyze the impact of different financial and macroeconomic determinants on the crosscountry stock market causality through a probit model. We find the difference in business conditions, excess return and size premium are the main drivers of the causality flows.

Keywords: international diversification; structural breaks; bootstrap rolling windows (search for similar items in EconPapers)
JEL-codes: F30 G11 G15 (search for similar items in EconPapers)
Pages: 72 pages
Date: 2019-06
New Economics Papers: this item is included in nep-cis
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