The Research On The Relationship Among The BRICS Stock Markets

Since the 1990s, there have been a lot of multilateral cooperation mechanisms in the international community. Most of these mechanisms are on the common geographical basis, which is a form of economic regionalism. The BRICS cooperation mechanism is a strong international cooperation mechanism based on functional cooperation and emerging countries identity. In the world history, there are few countries commonwealth which starts from the concept of economics into a political entity, the BRICS is an exception. As a leader in the emerging economies, due to the economics properties and politics properties that BRICS has, to study the relationship among the BRICS stock markers not only help understand the characteristics and sources of merging markets relationship under the framework of the BRICs, but also help form the recognition of the BRICS from the perspective of the capital markets.Stock association not only exists among the stocks of one country, but also across the stock markets of different countries. The theorists’explaination about the formation of the stock associated mechanism is from two levels, which are, fundamental relevant theory and behavior co-movement theory. Based on the efficient market hypothesis, the fundamental relevant theory believes that the stock price is determined by its intrinsic value, and the fundamentals association is the root cause of stock association. Specifically, it is the correlation between the changes of a stock’s expected cash flows and expected equity discount rate. However, there are more and more empirical evidence from developed markets show that fundamentals cannot fully explain the association between different stocks, which challenge the fundamental relevant theory and even EMH theory. As a useful complement to the fundamental relevant theory, the behavior co-movement theory emerged. For the association cannot be fully explained by the fundamentals, behavioral relevance theory holds that investors are not always rational, their peculiar trading behavior will form specific trading patterns, it is the relative changes among different stocks demand under the established trading pattern that causes stock returns association. While Barberis et al. (2005) distinguish behavior co-movements into two types, which are category-based and habitat-based co-movement.Current researches on cross-border stock association focus on the association among developed markets, or between emerging and developed markets, while the relationship between emerging markets has not yet got unified conclusion. For most developed markets having long histories, researches on the developed markets association are abundant. A large number of empirical studies have shown that, in the context of economic globalization and integration of global capital markets, association between developed markets are constantly changing. The overall trend is that, the association between developed markets has been strengthened from the beginning of the 1960s. With the time passing by, the association continues to strengthen, and the trend is especially obvious in the 21st century’s first decade. It is the eye-catching performance of merging markets that cause the academic emphasis on emerging markets. As an important integral part of global capital market, Emerging markets should show a considerable degree of dependence with developed markets. However, academia has been inconclusive on whether there is an association between emerging markets and developed markets. Some scholars believe that there is relationship between emerging markets, some scholars believe not. In particular, as the BRIC or the BRICS, the results are also varied. Nevertheless, there are a few researches treat the BRICS as a whole, or did not consider the South African stock market. The usage of unrestricted VAR model ignores the current association among the five markets, and without taking into account the sensitivity of the Granger causality test lag period selection.For the above reasons, from the perspective of stock index returns, the dissertation studies the relationship among the BRICS stock markets from four angles as follows, the linear correlation, mean spillover effects, volatility spillover effects and co-movement, using quantitative models such as SVAR model, multivariate volatility models and event study model. The influence factors of the BRICS stock markets linkages are also studies, as the concept of BRICS evolved from an economics concept into a political science concept during the past two decades.Put the BRICS stock markets development into the context of global capital market integration. In the same trading day, although the BRICS and the U.S. stock markets basically keep up with the same trend, U.S. current influences on the BRICS are not all that significant. After the BRIC concept emerges, U.S. overall influences on the BRICS are declining. After the BRIC cooperation mechanism expanded, China’s position in the BRICS has been continuously improved. China has become the biggest factor that affects Russia. The channels of information transmission among the BRICS stock markets are open, the performance of each country stock markets is mainly determined by the country’s stock market itself. The impulse response function analysis shows that, as time goes on, to every country except China, the importance of the impact from U.S. impulse are weakening. China impulse replaces the U.S. impulse, become the second-largest shock which affects Brazil, Russia and India stock markets in the first phase, even the shock from Russian has also exceeded the U.S. shocks, become more important to Brazil and South Africa. While the impacts of Brazil and India shocks on the other BRICS member countries are very limited, the shocks form South Africa often bring negative impact on the other BRICS member countries. Variance decomposition results show that currently the Brazilian stock market shocks are an important source of China stock market volatility, about a third of India stock market fluctuations can be explained by China and Brazil stock markets shock. Shocks form China and India stock markets could explain the volatility in Russia much better year after year. What’s most, nearly half of South African stock market volatility can be explained by the impacts from Brazil, Russia, India and China stock market shocks, the feature of the other BRICS stock markets have embodied in the South African stock market. Shocks from China stock market can explain the other BRICS stock market’s volatility much better. The BRICS stock markets association under the perspective of information transfer is basically consistent with the findings of the BRIC economic cycles interaction by He (2010), and there is further improvement. Fundamental relevant theory can be used to explain the short-term relationship among the BRICS stock market.Treat the BRICS stock market development as an organic whole under the framework of emerging markets. The BRICS stock markets have obvious ARCH and GARCH effect. The stock market volatility has the characteristics of clustered and persistence, which means shocks in the past have an important role for all future predictions. There is no exception even for such stable India and South Africa stock market. In order to reflect the dynamic correlation among the BRICS stock market, VAR (1)-GARCH (1,1)-DCC model is used as a framework to analysis the stock market volatility spillover effects as well as the influence factors of the BRICS stock markets linkages. As the fitted values of each variable’s conditional variance show, the volatility of South Africa stock market returns is the smallest of all the BRICS member countries, while Brazil, Russia and China stock market’s volatility is relatively large. It is China stock market that has the largest return fluctuation frequency. Brazil, Russia and China stock market conditional variance move with high synchronization, which is particularly evident during the period of financial crises. In the three major financial crises duration period, the conditional variances of these three stock markets show the trends in descending order. As the fitted values of each variable’s conditional correlation coefficient show, the BRICS stock markets have had a brief appearance of negative correlation around 1999, while it is normal to perform positive conditional correlation in the long term. Although the conditional correlations among BRICS show a gradual weakening trend from the end of 2011, the conditions correlation between Russia and China stock market is still growing. By rewriting the conditional mean model, the stock markets of BRICS exhibit a ’3+1+1’ division in the long term, volatility spillovers exist among Brazil, Russia and China stock markets, while India and South Africa stock markets are relatively independent. Most of the BRICS stock markets independence is improved over time. Most of the volatility spillovers among the BRICS stock markets exhibit negative effects, which can be explained by the fundamental relevant theory, while it is maybe the change of the cross-border investors risk appetite that express as a positive volatility spillover. By rewriting the conditional variance model, it is normal to witness the abnormal fluctuations without a sign in Russia stock market. Brazil stock market’s early volatility is the only factor that could significantly predict China stock market’s current fluctuations. Brazil stock market factors are decisive for China stock market’s volatility. By the end of 2001 to the middle of 2009, among the five BRICS stock markets, the importance of Brazil, Russia and China stock markets began to show, China has become a major importing country that absorbs other countries’volatility spillovers. It is more frequently to see the positive volatility spillovers among the BRICS stock markets, which looks like contagion effect. As time goes on, these volatility spillover effects diminish or disappear in varying degrees, most of the BRICS stock markets have become more independence. As the analysis on the influence factors of the BRICS stock markets linkages based on dynamics correlation show, both inter-state foreign trade contact and international capital flows would affect the bilateral association between any two of BRICS countries significantly. While other conditions remain unchanged, it is the cross-border capital flows which is in the form of equity portfolio that affect the BRICS stock market bilateral association most significantly. Comparing with internal factors, it is the external factors that influence the bilateral association at a higher degree.Divide the BRICS stock markets into two different parts, which are the advanced and secondary emerging markets. The behavior co-movement of the BRICS stock markets can be confirmed from two different angles, which are the co-movement among the BRICS stock markets and the co-movement between the BRICS and the international classification stock markets. Among the six typical historical events in the BRICS concept development process, although the appearances of overseas BRIC fund ,BRIC index, and the Cross-exchange trading of BRICS index futures, can strengthen the co-movement of BRICS stock markets as a whole, it still cannot alter the BRICS and international classification stock markets significantly. On the contrary, although the appearances of BRIC and the official recognition of the BRIC concept cannot significantly alter the co-movement of BRICS stock markets as a whole, it could change the BRICS and the international classification stock markets to some extent. It is the expansion of the BRICS cooperation mechanism that most important, by distinguishing between the declaration and effective date, the behavior co-movement of the BRICS stock markets can be verified more precisely. Specifically, by comparing with the pre-declaration period, the BRICS stock markets co-movement is weakened during the declaration period. It is the arrival of the effective date that the BRICS stock market co-movement began to be strengthened. The change of BRICS stock co-movement not only reflects a characteristic of overreaction, but also maintains a high level for a long period in the post-event period, which cannot be explained by increased speed of information diffusion. This illustrates the existence of category behavior of the cross-border investors who participate in the BRICS stock markets. This event can not only strengthen the BRICS stock market co-movement, but also have a significant impact on the co-movement changes between the BRICS and international classification stock markets. It plays a decisive rule in changing the trends of BRICS stock market co-movement. Thus, as an evolution of economics concept, in order to change the BRICS stock market co-movement significantly, it is necessary to accompany the emergence of cross-border investment and its participants.Regards to the issue of building a BRICS stock market portfolio that includes South Africa assets, South Africa had become a new member of the BRICS from the political sense, though it has not been widely accepted by the international investment community as an economic sense. The vast majority of current existing BRICS indices are actually BRIC indices, and the vast majority of existing BRICS portfolios are actually BRIC portfolios without South Africa assets. In order to track a specific benchmark index to minimize the tracking error, the dissertation built a specific BRICS portfolio that contains South Africa assets. The portfolio belongs to passively managed index fund portfolio which mainly invests the BRICS stock market blue-chip Indies. From April 2009 to November 2013, compared with other BRICS stock markets, South Africa stock market is the most efficient market among the five. Investors from the five countries are able to get benefits in the process of investing South Africa stock market, in which, Chinese investors benefit the most. The coefficient of variation of mainland Chinese blue-chip index returns series is the highest in the BRICS, and the mainland Chinese blue-chip index is also inefficient. However, thanks to the HK dollar relatively stable and the appreciation of the RMB against the U.S. dollar, and the good performance of the other BRICS stock markets blue chips, compared with other BRICS investors, Chinese investors have the incentive to invest in other BRICS stock markets blue chips. Investors can also get marginal gains while investing equally-weighted BRICS blue-chip index portfolio. Although the short selling rules of each BRICS stock market are not the same, short selling the BRICS blue-chip index would not face institutional obstacles. For mainland Chinese investors who are intent to build a BRICS portfolio, although a appropriate part of short selling the BRICS index helps improve the efficiency of investment, to build leveraged positions are not appropriate options to improve the efficiency of investment. Hong Kong’s Hang Seng Index and South Africa Top40 index plays an important role in building an investment portfolio. Under the short selling restrictions condition, investors tend to hold India SENSEX Index, Hong Kong’s Hang Seng Index and South Africa Top40 Index. To investors of all BRICS countries, South Africa Top40 index plays a very important role in the BRICS countries optimal risk portfolio. BRICS concept is not as what foreign financial media said, which refers that BRICS lost its investments and the golden light faded. South Africa became a new member of the BRICS countries, not only enriched the connotation of the BRICS countries, but also injected new vitality into the investment concept of BRICS. The good performance of the South African stock market is an important driving force for BRICS countries expected yield of the portfolio, the awareness of this help us to strengthen the recognition of the BRICS countries from the capital market perspective.