2011 International Conference on Information and Finance IPEDR vol.21 (2011) © (2011) IACSIT Press, Singapore
The structure of linkages and causal relationships between BRIC and developed equity markets Norasyikin Abdullah Fahami+
Mara University of Technology
Abstract. The study aims to examine the structure of linkages and causal relationship between the world’s fastest emerging economies (Brazil, Russia, India and China) and the selected developed countries namely, the United States (US), the United Kingdom and Japan. The leading indices of these stock markets are used as proxies of the market. The period of analysis is being divided into three sample period; the pre-crisis period spans from January 10, 2005 to July 22, 2007, during the crisis period spans from July 29, 2007 to January 10, 2010 and post-crisis period spans from January 11, 2010 until recently July 21, 2011. As for the methodology, the study conducted Augmented Dickey Fuller (ADF) and Phillip Pheron (PP) tests as prelimenary evaluation before proceed with Johansen Juselius (JJ) cointegration test and Granger causality test. The results show that all the stock markets under study are cointegrated in pre-crisis, during crisis and post crisis period. However, increasing causalities are recorded among stock markets in the crisis period as compared to pre- and post-crisis period. The results were in line with studies by Kassim (2010) and Chittedi (2009). China was the most influential stock market before the crisis period, whereas United States influenced most of the major equity markets during the period of turbulence. These indicate that, what happen to US stock market bring impact to the other equity markets worldwide despite the emergence of BRIC countries.
Keywords: BRIC countries, developed countries, cointegration, Granger causality.
Interrelationship and dynamic linkages among countries has been the topic of interest for many researchers, practitioners and policy makers especially after Asian financial crisis 1997/1998. This is due to the linkages have serious implications for international portfolio diversifications and macroeconomic policy of concerned countries. According to Markowitz (1952), investors can improve the performance of their portfolios by allocating their investments into different classes of financial securities and industrial sectors that would not move together in the event of valuable new information. Others who extend the domestic CAPM suggest that diversifying internationally enables investors to reach higher efficient frontier than doing so domestically. While, macroeconomic policy is utmost important since an escalating integration among the national stock markets implies that international financial instabilities are easily transmitted to domestic financial markets, a phenomenon called as ‘financial contagion’ (Ibrahim, 2005). Numerous studies beginning with Taylor and Tonks (1989), Chowdhry (1997) and Masih and Masih (2001) are among other researchers who have utilized Granger (1969) and Johansen Juselius (1990) techniques to assess international stock market cointegration in their studies. Noted that, majority of the studies focuses on the developed equity markets until recently, the equity markets of emerging economies has arouse remarkable interest among researchers. Examples of these studies are Ibrahim (2005), Yusof and Majid (2006), Majid et. al (2008) and Majid and Kassim (2009). They documented that United State (US) market is the most influential market in leading other equity markets.
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Among other emerging economies that received much attention are BRICs countries. Jim O’Neill of Goldman Sachs who coined the acronym expects that over the next 50 years, Brazil, Russia, India and China - the BRICs economies could become a much larger force in the world economy. Bhar and...
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