Risk spillovers and portfolio management between developed and BRICS stock markets |
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| Institution: | 1. Department of Finance and Accounting, University of Tunis El Manar, Tunis, Tunisia;2. Energy and Sustainable Development (CESD), Montpellier Business School, Montpellier, France;3. COMSATS Institute of Information Technology, Islamabad, Pakistan;4. Lebow College of Business, Drexel University, Philadelphia, United States;5. College of Business and Economics, Qatar University, Qatar;6. Shaheed Zulfikar Ali Bhutto Institute of Science and Technology (Szabist), Islamabad, Pakistan;7. Department of Economics and Finance, College of Economics and Political Science, Sultan Qaboos University, Muscat, Oman;1. USEK Business School, Holy Spirit University of Kaslik, Jounieh, Lebanon;2. College of Business, University of Texas at San Antonio, One University Circle, San Antonio, TX 78249, USA;3. Center for Energy and Sustainable Development, Montpellier Business School, Montpellier, France;4. Montpellier Business School, Montpellier France;1. Department of Finance and Accounting, University of Tunis El Manar, B.P. 248, C.P. 2092, Tunis Cedex, Tunisia;2. Department of Finance and Investment, College of Economics and Administrative Sciences, Al Imam Mohammad Ibn Saud Islamic University (IMSIU), P.O Box 5701, Riyadh, Saudi Arabia;3. Lebow College of Business, Drexel University, Philadelphia, United States;4. Energy and Sustainable Development, Montpellier Business School, Montpellier, France;5. Department of Business Administration, PNU School of Business, Pusan National University, Busan 609-735, Republic of Korea;1. Department of Finance and Accounting, University of Tunis El Manar, Tunis, Tunisia;2. Department of Economics and Finance, College of Economics and Political Science, Sultan Qaboos University, Muscat, Oman;3. Lebow College of Business, Drexel University, Philadelphia, United States;4. Energy and Sustainable Development (ESD), Montpellier Business School, Montpellier, France;5. College of Business and Economics, Qatar University, Qatar;6. Faculty of Business Administration, Bilkent University, Ankara 06800, Turkey;7. Department of Business Administration, Pusan National University, Busan, Republic of Korea |
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| Abstract: | This paper investigates spillover effects and portfolio diversification between the four major developed stock markets (USA, Europe, Japan and Asia) and five of the most important emerging stock markets known as the BRICS (Brazil, Russia, India, China and South Africa). To this end, we apply the multivariate DECO-FIEGARCH model to daily spot indices during the period 1998–2016. The results reveal a significant and asymmetric long memory process for both the developed and the BRICS markets. Moreover, we find a significant variability in the time-varying conditional correlations between the considered markets during both bull and bear markets, particularly from early 2007 to summer 2008. Additionally, we analyze the optimal portfolio weights, time-varying hedge ratios and hedging effectiveness based on the estimates of the model. The results underline the importance of overweighting the optimal portfolios with stocks from the developed countries over those from the BRICS. Finally, we assess the practical implications for mixed developed-BRICS stock portfolios, based on finding strong evidence of diversification benefits and downside risk reductions that confirm the usefulness of using developed market stocks in the BRICS stock portfolio risk management. |
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| Keywords: | Stock markets Volatility Time-varying hedge ratios Downside risk Multivariate DECO-FIEGARCH |
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