Time-frequency domain analysis of investor fear and expectations in stock markets of BRIC economies

Abstract

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

“…In a static spillover paradigm, Zhang et al [ 27 ] analyse the connectedness of G7 and BRIC economies. However, the operability of markets and investor behaviour are shown to follow dynamic patterns and, hence, evidence from static connectedness measures may be insufficient for time-based investors operating across the short-, medium-, and long-term periods [ 5 , 11 , 23 – 25 , 34 ]. Analysis of safe-haven assets [ 39 ], risk-aversion comovements [ 40 ], spillovers dynamics between developed and emerging economies, and commodity futures [ 28 ] have all been studied with much emphasis on G7 markets and to some extent, BRIC economies.…”

“…Notwithstanding, BRIC economies continue to affect the global financial stability setting [ 5 ], due in part to the growth of risks of bi-directional spillovers between developed and developing markets [ 6 ]. Thus, as the principles of the portfolio selection theory [ 7 ] detail, investors from developed markets–which are known to be more integrated–almost always seek assets from developing and emerging economies–which are relatively less integrated–to maximise (minimise) portfolio returns (risk); this has seen the spillovers between these markets increasing.…”

“…Notwithstanding, high volatility has been a feature of financial markets, particularly during instances of structural disruption, such as the COVID-19 pandemic, the Brexit effect (we define the Brexit effect as the substantial losses borne by global investors on 24 June 2016 following the referendum that confirmed Britain’s exit (Brexit) from the European Union [ 64 ]), the GFC, and the 2011/12 Eurozone debt crisis (EDC). During bullish and bearish markets, these markets also display nonlinear behaviour in reaction to direct and inverse shocks, resulting in portfolio rebalancing as a result of shifting co-movements [ 4 , 5 , 18 – 20 ]. Appreciating the volatility behaviour of equity markets amid significant events and crises, especially the time-varying spillover connectedness between the equity markets of most influential emerging economies, such as the BRIC, and major advanced economies, is a principal challenge for multinational investors and policymakers [ 21 ].…”

“…In the future, BRIC’s effect on the global economy may surpass that of the G7. The dynamic interaction between the financial markets of the BRIC countries and the G7 countries has gotten a lot of attention recently [ 5 , 27 – 30 ]. International investors are particularly interested in the idea of BRIC replacing the G7 as a major source of international risks since this might lead to extended market integration which may alter investment, speculation, and risk diversification options [ 27 ].…”

Financial sector and economic growth amid external uncertainty shocks: Insights into emerging economies

“…Thus, the application of bivariate, partial and wavelet multiple correlations (WMC) is important in this study. While bivariate wavelet coherence is a technique that shows the correlation between two variables, partial wavelet shows the comovements between two variables relative to a common interdependence, and the resulting wavelet transformation coherence of several variables is ideal for WMC [ 42 ]. Specifically, we seek to examine the lead-lag relationships at the diverse time and frequency domains using the bivariate and partial wavelet analysis.…”