Contagion Effect among the BRICS Stock Market Indices

Abstract

This paper deals with Stock market returns of five emerging economies i.e. Brazil, Russia, India, China, and South Africa (BRICS). The paper attempts to establish the linkages and relationship among the returns of these BRICS Stock Exchanges and examines the effect of the stock index of one country on the stock index of other country. The daily Index returns of all the five stock exchanges are taken from 2007 to 2014. Long term relationship has been tested by Johansen Co-integration test to show long run association among BRICS stock exchange indices. ADF, Unit Root Test and Granger Causality have been applied to find out the cause and effect relationship among the Nifty Index and BRICS Stock Exchanges Indices. Further Vector Auto Regression in the form of Impulse Response Function and Variance Decomposition Model are applied to validate the results obtained from Granger Causality Test. The study shows that there is a significant and positive correlation among Nifty and other BRICS indices. However long run association was not found among Nifty and rest of the stock indices. Unidirectional causality is observed in Nifty with South African and Chinese Stock Indices whereas bi-directional relationship was found among Indian, Brazil and Russian Stock Indices. The results reveal that there are visible effects of stock exchanges indices return on each other’s stock returns. Since the study is confined to BRICS Stock Market only effect of FIIs investment and influence of leading Stock Market cannot be ruled out, which requires further study. The results suggest less co integration in the long run, therefore international investors can reap benefits from portfolio diversification. This paper offers insight into the inter linkages among the BRICS indices and provides important insights for investment and speculative decisions.

Keywords: Nifty Index, Co-integration, Stock Exchanges, Portfolio Diversification, Granger Causality, Interlinkages.