This study estimates the return and volatility spillovers among the BRICS countries (internal) and between BRICS, gold, oil and US stock markets (external). We find that internal return and volatility spillovers are higher than their external spillover counterparts. Thus, investors would be better off diversifying their investments in gold, oil and US stock markets along with the emerging economies. Interestingly, we also find that the return spillovers are higher than their volatility spillover counterparts, thus presenting investors with an opportunity to diversify their portfolio risk. With respect to portfolio constitution, South Africa emerges as the top choice for investment within the BRICS, whereas gold is the preferred choice for investors outside the BRICS economies.
This paper investigates the risk exposure for options and proposes MaxVaR as an alternative risk measure which captures the risk better than Value-at-Risk especially. While VaR is a measure of end-of-horizon risk, MaxVaR captures the interim risk exposure of a position or a portfolio. MaxVaR is a more stringent risk measure as it assesses the risk during the risk horizon. For a 30-day maturity option, we find that MaxVaR can be 40% higher than VaR at a 5% significance level. It highlights the importance of MaxVaR as a risk measure and shows that the risk is vastly underestimated when VaR is used as the measure for risk. The sensitivity of MaxVaR with respect to option characteristics like moneyness, time to maturity and risk horizons at different significance levels are observed. Further, interestingly enough we find that the MaxVar to VaR ratio is higher for stocks than the options and we can surmise that stock returns are more volatile than options. For robustness, the study is carried out under different distributional assumptions on residuals and for different stock index options.
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