stock market interdependence of brics & developed markets

7/24/2019 Stock Market Interdependence of BRICS & Developed Markets

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A STUDY ON THE INTERDEPENDENCE OF THE STOCK MARKETS OF DEVELOPED AND EMERGING ECONOMIES DURING THE PRE AND POST

2008 GLOBAL FINANCIAL CRISIS

Ms. S.R.Deepik

Assis!"! P#$%ess$#

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D#. S. P$$#"i*Ass$&i!e P#$%ess$#

PSGR K#is'"**( C$((e)e %$# $*e"

M.P'i( Vi- V$&e e/*i"!i$"012120


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Synopsis

Introduction to the Study

Diversification of Investments

International Diversification

Stock Markets of Developed Economies

Stock Markets of Emerging Economies

Interdependence of the Stock markets

2008 Global inancial !risis and inancial contagion

"eed for the study

#b$ectives of the study

%evie& of 'iterature Methodology of the study

(nalysis and Discussion

indings

Suggestions

Scope for future research


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Introduction

Economic gro&th of a country relies on an efficient stock market ) pools

domestic savings and mobili*es capital for productive investments+

Governments, Industries and inancial Institutions like -anks al&ays keep

track of the stock market trends

The stock market index that measure the overall performance of the

market is calculated by selecting a group of stocks that are representative of

the &hole market+

.he inde/ functions as a status report on the economy as impacts of the

various economic policies are reflected on the stock market+


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!ont

Studies have proved, time and again, that shares 1or euities3 are

one of the best long)term investments in the financial market

place+ .hey tend to outperform government bonds, corporate

bonds, property, commodity and many other types of asset+

Investing in stock market gives huge returns at the same time it is

highly risky+

.hus both practitioners and theoreticians recommend holding a

&ell)diversified portfolio to reduce risk+


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Diversification of Investments

4Don5t put all of the eggs in one basket+4

( &ise investor ) minimi*e risk and ma/imi*e the return on his investment+

Marko&it* 16723 ) the investor should hold a &ell)diversified portfolio of several securities

&hich should be negatively correlated &ith one another+

Since the mid)6790s, it has also been argued that geographic diversification &ould generate

superior risk)ad$usted returns+

.he bias for investing only &ithin national borders is diminishing+

:ith the liberali*ation of stock markets in recent years, there has been an increase in investors;

interest in international diversification+

Solnik 1679


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Developed Economies

.he criteria for evaluating the degree of economic development are gross

domestic product 1GD=3, the per capita income, level of industriali*ation,

amount of &idespread infrastructure+

Stock Markets of Developed Economies

Country Stock Exchange Index

?S( "e&york Stock E/change Do& @ones Industrial (verage

?A 'ondon Stock E/change .SE 600@apan

.okyo Stock E/change "ikkei 22Germany

rankfurt Stock E/change D(Brance

Eurone/t =aris !(!


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Emerging economies

Economies that are bet&een the stages of 4developing4 and 4developed+4

BRICS is the acronym for an association of five ma$or emerging national

economiesC Brail! Russia! India! China and South "frica#

.he idea &as first conceived in 2006 by Goldman Sachs as part of an economic

modelling e/ercise to forecast global economic trends over the ne/t half century+

.hese countries encompass over 2 of the &orld;s land coverage and


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Stock Markets of Emerging Economies

Country Stock Exchange Index

-%(FI' -M -ovespa I-#HES=(

%?SSI( Mosco& E/change %.S

I"DI( -ombay Stock E/change S= -SE SE"SEB

!I"( Shanghai Stock E/change SSEJ!#M=#SI.E

S#?. (%I!( @ohannesburg Stock

E/change

.SEK@SE


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Interdependence of the stock markets

#riginally, the stock market interdependence studies generally had the ob$ective to e/amine

the diversification benefits gained by investing across international markets+

Most recent studies post)6779 (sian financial crisis (loui et al+, 120663 (n and -ro&n 120603

&orked mainly on the integration and dynamic linkages of the relevant international stock

markets &ith the help of modern econometric techniues+

Earlier studies by %ipley 16793, 'essard 1679>3 and illiard 167973 International =ortfolio

Diversification &as recommended on the assumption of lo& correlation among different

national stock markets+

.he gro&ing international trade, deregulation of the financial systems and gro&th in

international capital flo&s, have made national economies become more closely linked+

(ny macroeconomic disturbances or crisis in one part of the &orld has a uick effect on the

others &ith varied intensity and degree


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$%%& 'lo(al )inancial Crisis and

)inancial contagion

Many analysts consider the 2009)08 financial crisis to be the most serious

financial crisis for the &orld economy+

.he crisis that culminated in 2008 resulted from a liuidity shortfall in the ?S

banking system caused by overvalued assets that &ere securiti*ed and insured

before being traded on international markets+

.he meltdo&n spread uickly to European financial markets, causing a number

of bankruptcies+ .his une/pected situation captured the attention of the

international investment community, &ho began to search opportunities for

investment, risk diversification and high return)to)risk ratios+


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*eed for the study

:ith the gro&ing global economy, understanding international stock market

interdependencies has become vital for investors &ishing to diversify their

portfolios on a global basis+

It is important to determine the countries &hose stock prices move together,

those &hose stock prices move in opposite directions and those &hose stock

prices are unrelated all together+

.he lack of accurate determination of stock market price movements holds any

portfolio at a higher risk level than necessary due to the presence of the

diversifiable risk+

.he thorough understanding and accurate assessment of the impact of one

international stock market over the others is essential


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+(,ectives of the study

.o comprehend the characteristics of distribution of the stock market returns

among developed and emerging markets+

.o determine the strength and the direction of the relationship bet&een stock

markets of select developed and emerging economies

.o identify &hether the time series data is stationary and their means,

variances and covariances do not change over time

.o identify &hether the stock markets of advanced economies has significant

e/planatory po&er on the stock market of emerging economies


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Revie- of .iterature

Grubel and Fadner

(1971)

There are signifcant gains rom international

diversifcation

Wheatley (1988)

naly!ed the data" o #$ and 17 other countries" by

a%%lying &' and unit root tests" or the %eriod 19*

198+" and su%%orted the notion o e,uity*mar-etintegration.

/amao" 0asulis (199)

There ere considerable interactions among stoc-

mar-et inde2es" ith one*ay causality running rom

the #$ to other mar-ets" including /ong 3ong and

4a%an5lyasiani et al. (1998) 6o signifcant interde%endence beteen the $ri

an-an mar-et and the e,uity mar-ets o the #$ and

the sian mar-ets considered

3umar () $toc- inde2 o ndian stoc- mar-et as not co*

Mishra (2002) No co integrating vector between BSE and NASDAQ indices


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Mishra (2002) No co integrating vector between BSE and NASDAQ indices

Hatemi and Roca

(200)

A!stra"ia had no ca!sa" "in#s with $erman% and &rance b!t it had

with the ' with ca!sa"it% r!nning *rom the ' to A!stra"ia b!t not

vice+versa

Magh%ereh (200,) None o* the MENA mar#ets is com-"ete"% iso"ated and inde-endent.

M!#her/ee and

Mishra (200)

1ncreasing tendenc% o* integration among the mar#ets

and discovered that co!ntries o* same region are *o!nd to be moreintegrated than others.

Dr Sai* Siddi!i

(2003)

4he interde-endencies among the indices o* S56 7N8 Ni*t% and

se"ected Asian 5 'S Stoc# Mar#ets has increased over a -eriod

Ba" rishan

(2099)

4ested the 6attern o* 1ndian 1ndices with :ther 7o!ntr% 1ndices and

*o!nd that one cannot take full advantage of diversification and

pattern of international stock markets

6!rna 7handra

(209;)

A"tho!gh stoc# mar#ets are integrated g"oba""% the integration is

ver% wea#.


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Methodology of the study

Research Type/ .he study is analytical in nature that e/amines a time series of &eekly

closing inde/ prices of select stock markets of emerging and developed economies and

studies the level of interdependencies bet&een them and their causal relationship+

Sampling Design/ 1IM3 has classified > countries as advanced economies and 2> countries

as emerging economies+ .he study considers the top advanced economies in terms of

nominal GD= ) ?S(, @apan, Germany, rance, ?A and the most popular emerging economies

) -ra*il, %ussia, India and !hina

0eriod of the study/ 200 L 206+

.he time period is divided into sub)periods

=re crisis period from @an 200 to Dec 200>

!risis period from @an 2009 to Dec 2007

=ost crisis period from @an 2060 to December 206+


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"nalysis 4 Discussion

5S"# 56# 7"0"* 'ERM" )R"* BR"8I. I*DI" R5SSI" C9I*"

D+:;7+*ES )TSE;


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C9"R"CTERISTICS +) DISTRIB5TI+* +) T9E ST+C6

M"R6ET RET5R*S D5RI*' 0ERI+D2 II @$%% 2$%%

5S"# 56# 7"0"* 'ERM )R"* BR"8 R5SSI" I*DI" C9I*"

D+:;

7+*ES

)TSE;


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C9"R"CTERISTICS +) DISTRIB5TI+* +) T9E ST+C6

M"R6ET RET5R*S D5RI*' 0ERI+D2 II @$% C"C;?%

IB+3

ES0" RTSI

BSE;SE*

SE>

SSE;C+

M0

Mean

0+00226

8 0+0060> 0+002086 0+00227 0+000+2E)0> 0+000726 )0+00207

Std+ Dev+

0+02068

7 0+026798 0+029>8 0+028>7 0+027>00 0+028277 0+09862

)

0+72< )0+0 )0+602>96 )0+876 0+68687 0+07762

Aurtosis

+26 +6


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C+RRE."TI+* +) T9E ST+C6 M"R6ET RET5R*S D5RI*' 0ERI+D I 2 @$%%A 2$%%

BR"8I. R5SSI" I*DI" C9I*"5S"#

56# 7"0"* 'ERM"*F )R"*CE

BR"8I. 6

R5SSI" 0+9 6

I*DI" 0+> 0+28 6

C9I*" %#


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C+RRE."TI+* +) T9E ST+C6 M"R6ET RET5R*S D5RI*' 0ERI+D II 2 @$%% 2$%%

BR"8I. R5SSI" I*DI" C9I*"5S"#

56# 7"0"* 'ERM"*F )R"*CE

BR"8I.6+00

R5SSI"0+>> 6+00

I*DI"0+>< %#% 6+00

C9I*"0+67 0+66 0+20 6+00

5S"#

%# %#=A %#= 0+09 6+00

56#%#&A %#% %#< 0+60 %#& 6+00

7"0"*%#< %#= %#< 0+2< %#A %# 6+00

'ERM"*F%#&A %#= %#= 0+6 %#& %#A %# 6+00

)R"*CE%#&$ %#= %#A 0+66 %#& %# %# %#= 6+00


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C+RRE."TI+* +) T9E ST+C6 M"R6ET RET5R*S D5RI*'

0ERI+D III 2 @$%< 0+>< 0+ 0+27 6+00

56#0+>7 0+>8 0+>6 0+ 0+8 6+00

7"0"*0+ 6+00

'ERM"*F0+> 0+>9 0+> 0+2 0+8< 0+8> 0+> 6+00

)R"*CE0+>7 0+>9 0+ 0+29 0+8 0+87 0+> 0+72 6+00

S O S O O S OC


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TEST OF STATIONARITY ON THE STOCK MARKETRETURNS DURING

PERIOD=I 6200> =200?

Indices

.evel

Decision.ag "D) Statistic 023alue

I-#HES=( 6 )7+07269 0+0000 Stationary

%.S 6 )60+99 0+0000 Stationary

S= -SE SE"SEB 6 )8+268> 0+0000 Stationary

SSE !omposite )2+99>788 0+00> Stationary

Do& @ones 0 )6+2082 0+0000 Stationary

.SE 600 )9+76689 0+0000 Stationary"ikkei 22 0 )66 0+0000 Stationary

D(B )>+97208 0+0000 Stationary

!(! +


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TEST +) ST"TI+*"RITF +* T9E ST+C6 M"R6ET RET5R*S

D5RI*' 0ERI+D2II @$%% 2$%%

.evel

Indices .ag "D) Statistic 023alue Decision

I-#HES=( 0 )6+7882 0+0000 Stationary

%.S )+99>77 0+0008 Stationary

S= -SE SE"SEB 6 )>+87> )07> 0+0000 Stationary

.SE 600 62 )+>6068 0+000< Stationary

"ikkei 22 6 )9+>78> 0+0000 Stationary

D(B 2 )8+0786


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TEST +) ST"TI+*"RITF +* T9E ST+C6 M"R6ET RET5R*S

D5RI*' 0ERI+D2III @$%>99 0+0000 Stationary

Do& @ones 0 )6+82


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HE!.#% (?.#%EG%ESSI#" LG%("GE% !(?S('I. .ES.

Dependent 3aria(le IndependentG InfluencingG Causal 3aria(le

;ountry

@Stock market Index

0eriod I H

@$%%A 2$%%

0eriod II H

@$%% 2$%%

0eriod III H

@$%


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Findings

%ussia 1%.SI3 yielded the highest mean return and e/hibited highest volatility in the pre)crisis

period+ During the crisis period the returns of ?S(, ?A, @apan, Germany and rance recorded

negative mean returns+ o&ever the returns of -ra*il, India and !hina e/hibited positive mean

returns, it &as observed to be less than the mean returns of the pre)crisis period+

(ll the emerging markets -ra*il, %ussia and !hina e/cept India e/hibited negative mean returns

in the post)crisis period+ o&ever the mean returns &ere observed to be very less &hen compared

to the pre)crisis period+

.he standard deviation of the stock market returns of developed and emerging markets had gone

up drastically during the crisis period &hen compared to the pre)crisis period and had come do&n

in the post)crisis period+

.he Ske&ness and Aurtosis values revealed that the data &as not normally distributed in all the

three periods+


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indings

.he correlation study reveal that in period I, all the developed markets

e/hibited strong positive correlation &ith each other but there &as &eak

positive correlation &ith emerging markets+

In period)II there &as a surge in the level of correlation bet&een the

stock markets of different countries and had come do&n in period ) III+

?nlike other studies it &as found that the data series taken for analysis in

this study &as stationary at level, as &e have considered &eekly log

returns of the inde/ for analysis+


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indings

.he H(% Granger causality discloses that the ?S

market highly influenced all other markets during the

times of crisis but gradually its influence on other

markets had disappeared after the crisis+

.he t&o ma$or emerging markets India and !hina

&as not influenced by any other market nor did it

influence others in the post crisis period+


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Suggestions

Safe Diversification

.he causal relationship study revealed that the India 1-SEJSE"SEB3 &as not

influenced by the stock market returns of any other country in the =ost)crisis period

and it is observed that India &as the only emerging market that yielded positive

mean return in all the periods of study+ .hus India seems to be a better investment

destination for international investors+

!hina is the only country that &as not influenced by ?S( in the crisis period+ !hina

had recently opened their doors for foreign investments and thus foreign investors

can make best use of this opportunity for diversification benefits by investing in

!hina+


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$uggestions

5nsafe Diversification

It is unsafe to hold %ussian and -ra*ilian euities in the portfolio

&hen an investor seeks international diversification opportunities in

emerging -%I! countries+

.he stock market returns of all the developed markets ?S(, ?A,

Germany and rance e/cept @apan e/hibited strong positive

correlation bet&een each other in all the periods and therefore

diversifying investments among these markets is not advisable+


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SC+0E )+R )5T5RE RESE"RC9

.he study can be e/tended to other markets like Me/ico, Indonesia, South

Aorea and .urkey that fall under the ne/t eleven category

.he daily End of the Data 1E#D3 can be refined and used for analysis in the

future studies as it &ill capture the entire market happenings than the :eekly

data

.est for structural breaks can be employed to break the une/pected shift in the

time series data in future studies to arrive at e/act results

Hariance Decomposition and Impulse %esponse function can be used in future

studies to evaluate ho& shocks reverberate through the time series data


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stock market interdependence of brics & developed markets

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