Do the carry trades respond to geopolitical risks? Evidence from BRICS countries

This paper aims to analyze the implications of geopolitical risks on the return and volatility of carry trade transactions in the context of BRICS countries for the period 2006–2020. Fixed effects regressions considering the sample countries as a single portfolio document that geopolitical risks are correlated with volatility, while the results are inconclusive for returns. The non-parametric time-varying coefficients panel data estimations further indicate that the effect of geopolitical risks on carry trade volatility is amplified during the Global Financial Crisis and the post-2016 episode. Moving to the disaggregated data, the time-varying robust Granger causality test of Rossi and Wang (2019) show that geopolitical risks have a significant in-sample predictive power for both carry trade return and volatility during a myriad of sub-periods, which can not be captured by standard constant parameter techniques in the presence of instabilities. Overall, our empirical results suggest that the exposure to geopolitical risks should be taken into account by global investors for risk diversification purposes when entering carry trade positions in BRICS countries.     

New insights into the role of global factors in BRICS stock markets: A quantile cointegration approach

Because of the acceleration in marketization and globalization, stock markets in the BRICS (Brazil, Russia, India, China, and South Africa) countries are affected by various global factors, for example, oil prices, gold prices, global stock market volatility, global economic policy uncertainty, financial stress, and investor sentiment. This paper offers new insights into the short- and long-run linkages between global factors and BRICS stock markets by applying the quantile autoregressive distributed lags (QARDL) approach. This novel methodology enables us to test short- and long-run linkages accounting for distributional asymmetry. That is, the nonlinear dynamic relationship between the global factors and BRICS stock prices depends on market conditions. Our empirical results show that the effects of gold prices and global stock market volatility on BRICS stock prices are more significant in the long run than in the short run. A decrease in global stock market volatility is associated with higher stock prices, while gold prices demonstrate upward co-movement in dynamic correlations with stock markets. Irrational factors, such as economic policy uncertainty, financial stress, and investor sentiment, play a critical role in the short term, and negative interdependence is dominant. Finally, the rolling-window estimation technique is used to examine time-varying patterns between major global factors and BRICS stock markets.     

Time-frequency effect of crude oil and exchange rates on stock markets in BRICS countries: Evidence from wavelet quantile regression analysis

This study examines the effects of oil prices and exchange rates on stock market returns in BRICS countries (Brazil, Russia, China, India and South Africa) from a time–frequency perspective over the period 2009–2020. We use wavelet decomposition series to develop a threshold rolling window quantile regression to detect time–frequency effects at various scales. The empirical results are as follows. First, our findings confirm that the effects of both crude oil prices and exchange rates on BRICS stock returns are asymmetric. Positive shocks of crude oil have a greater impact on a bull market, whereas negative shocks have a greater impact on a bear market. Second, there is a short-term enhancement effect of crude oil and exchange rate on BRICS stock markets. In addition, volatility in the macro financial environment also exacerbates the impacts of oil prices and exchange rates on the stock market, and these fluctuations are heterogeneous. Overall, these findings provide useful insights for international investors and policy makers.     

Country risk and stock market volatility,predictability, and diversification in the Middle East and Africa

With globalization, an understanding of country risk (political risk (PR), financial risk (FR), and economic risk (ER)) and its impact on stock market return volatility and predictability is important for evaluating direct investment and country selection decisions in globally and regionally diversified portfolios. This paper examines these issues in the context of the Middle East and Africa (MEAF) and analyzes 10 stock markets in the region over the period 1984–1999. After examining volatility and predictability, this paper explains how portfolios of stocks can be formed from these countries in order to achieve mean–variance efficient portfolios. This paper generally finds that country political, financial and economic risks significantly determine stock volatility and predictability. The diversification exercise shows that an international investor can still benefit by diversifying into the stock markets of Middle East and African countries.     

Following the leaders? A study of co-movement and volatility spillover in BRICS currencies

The paper investigates return co-movement and volatility spillover among the currencies of Brazil, Russia, India, China, and South Africa (the BRICS member countries) and four major developed countries from April 2006 to October 2019. Using Bloomberg daily data on exchange rates, the study employs a flexible multivariate generalized autoregressive conditional heteroskedasticity (MGARCH)–dynamic conditional correlation (DCC) model and a vector autoregressive (VAR)–based spillover index, as the empirical strategy. Along with evidence of exchange rate volatility in BRICS currencies, among which the Russian ruble and the Chinese yuan are explosive, the econometric estimation results show the presence of significant return co-movement and volatility spillover among the foreign exchange markets across different countries. The currency markets in developed countries, as leaders, are found to transmit volatility mostly to BRICS currency markets, which are net receivers. The degree of spillover, however, varies across countries, with Brazil and Russia passing on volatility to the developed countries whereas India, China, and South Africa receive volatility from their developed counterparts.     

Geopolitical risk and stock market volatility in emerging markets: A GARCH – MIDAS approach

In this study, we examine the connection between geopolitical risk (GPR) and stock market volatility in emerging economies. Our motivation for this study is premised on the need to assess both the predictability and the associated economic gains in relation to the subject in order to offer more useful insights to investors and practitioners. To the best of our knowledge, this is the first study that jointly considers these objectives. Consequently, we employ the GARCH-MIDAS framework which accommodates mixed data frequencies thereby circumventing information loss or any associated bias. We find that emerging stock market volatility responds more positively to geopolitical risks although the act-related GPR index offers better out-of-sample forecasts than the threat-related GPR. We also find that accounting for global economic factors in the predictability analysis is crucial for robust outcomes. Finally, we provide some utility gains of including GPR in the predictive model of stock market volatility while also highlighting some useful implications of our findings for investment and policy decisions.     

Modeling dynamic conditional correlations with leverage effects and volatility spillover effects: Evidence from the Chinese and US stock markets affected by the recent trade friction

In this article, we investigate the dynamic conditional correlations (DCCs) with leverage effects and volatility spillover effects that consider time difference and long memory of returns, between the Chinese and US stock markets, in the Sino-US trade friction and previous stable periods. The widespread belief that the developed markets dominate the emerging markets in stock market interactions is challenged by our findings that both the mean and volatility spillovers are bidirectional. We do find that most of the shocks to these DCCs between the two stock markets are symmetric, and all the symmetric shocks to these DCCs are highly persistent between Shanghai’s trading return and S&P 500′s trading or overnight return, however all the shocks to these DCCs are short-lived between S&P 500′s trading return and Shanghai’s trading or overnight return. We also find clear evidence that the DCC between Shanghai’s trading return and S&P 500′s overnight return has a downward trend with a structural break, perhaps due to the “America First” policy, after which it rebounds and fluctuates sharply in the middle and later periods of trade friction. These findings have important implications for investors to pursue profits.     

Do natural disasters and geopolitical risks matter for cross-border country exchange-traded fund returns?

This paper examines whether U.S. and home country geopolitical risks (GPRs) and disasters matter for the returns from cross-border trading of country exchange-traded funds (ETFs) by employing a quantile regression approach. Using monthly returns of 125 country-specific ETFs traded in the U.S. from 38 countries over the period 2004–2018, we find that the highest averages of total deaths, total damage values, total affected, and GPRs are all in developing countries. United States disasters have comparatively more significant impacts than home country disasters on ETF returns as does the salient influences of U.S. investor sentiments, supporting the market sentiment hypothesis. Moreover, U.S. and home country GPRs and disasters also have predictive power on returns. The contemptuous effects and predictive powers of GPRs and disasters are asymmetric across quantiles. The influences of home country GPRs are more salient than the GRPS of U.S., implying that ETFs can be a safe haven during U.S. geopolitical risks. Additionally, our results show that the impacts of disasters on returns can be negative and/or positive, implying the possibility of disasters exuding an impetus and/or risk to country ETFs.     

我国沪、深股市的波动性研究——基于GARCH族模型

金融市场的波动性不仅是投资者关注的焦点之一,而且也是被研究的热点之一。中国股市还非常年轻,股票市场的价格常常表现出大幅波动的特征。本研究以上证综合指数和深圳成分指数为研究对象,分别运用GARCH模型、TARCH模型和EGARCH模型同时拟合,并对比分析了中国股市日收益率波动的动态特征;结果显示,EGACH模型能更有效拟合股市的波动性。