Spillovers and contagion between BRIC and G7 markets: New evidence from time-frequency analysis

Abstract

We examine the time-frequency spillovers, contagion, and pairwise interrelations between the BRIC index and its constituents, and between BRIC and G7 economies. The extent of interdependencies between market blocs and their constituents needs to be ascertained in the time-frequency domain for efficient asset allocation and portfolio management. Accordingly, the Baruník and Křehlík spillover index is employed with daily data between 11th December 2015 and 28th May 2021. We find the overall and net spillovers between BRIC and G7 to be significant in the short-term, with France, Germany, and the UK transmitting the greatest shocks to BRIC markets. We find no significant evidence of any sporadic volatilities for the studied markets in the COVID-19 period across all frequencies. However, we reveal contagious spillovers between the BRIC and G7 economies across all time scales in 2017 and 2019, which respectively reflect the persistent effect of Brexit and the US-China trade tension. Our findings divulge that in the short-term (mid-to-long-term), France and the UK (Canada and the US), are the sources of contagion between the BRIC and G7 markets. From the net-pairwise spillovers, we report high connectedness between the BRIC index and its members. BRIC countries are found to be transmitters of net-pairwise spillovers to the G7 markets excluding Japan. We recommend portfolio diversification using BRIC and G7 stocks in the intermediate-to-long-term horizon, where spillovers are less concentrated. Additionally, since individual markets are impacted by their unique shocks, investors should pay close attention to these shocks when distributing assets. In the interim, policy-makers and governments across the globe should ensure effective liberalisation of their economies to encourage international trade flows to boost portfolio diversification.

Diversification Benefits between Stock Returns from Ghana and Jamaica: Insights from Time-Frequency and VMD-Based Asymmetric Quantile-on-Quantile Analysis

“…Similarly, together with these assets, world risk sentiment (see [5,15]; etc.) could be incorporated into a multivariate setting, as used by [2], to additionally test the hedging prospects of these assets [34][35][36][37].…”

Emerging markets equities’ response to geopolitical risk: Time-frequency evidence from the Russian-Ukrainian conflict era

“…To financial market participants, the major consequence resulting from this may be envisaged from the context of portfolio management. Developed markets are noted for high integration and, as such, assets from emerging markets appeal to international investors for hedging extreme risks during financial market meltdowns [ 13 ]. Hence, the need to test EMEs' resilience against geopolitical risk is aroused by the market shocks pioneered by the Russian-Ukrainian geopolitical conflict.…”

Time-Frequency Connectedness between Shariah Indices in a Systemic Crisis Era

“…By doing so, safe assets like faith-based investments and nontraditional assets like bonds and commodities appeal to investors. Hence, the rush for these assets is most likely a cause for their high return linkages in the short term during tumultuous trading periods [44].…”