A revisit to stock market contagion and portfolio hedging strategies: BRIC equity markets and financial crisis

Singh, Amanjot and Singh, M 2017, A revisit to stock market contagion and portfolio hedging strategies: BRIC equity markets and financial crisis, International Journal of Law and Management, vol. 59, no. 5, pp. 618-635, doi: 10.1108/IJLMA-03-2016-0026.

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Title A revisit to stock market contagion and portfolio hedging strategies: BRIC equity markets and financial crisis
Author(s) Singh, AmanjotORCID iD for Singh, Amanjot orcid.org/0000-0003-3575-4382
Singh, M
Journal name International Journal of Law and Management
Volume number 59
Issue number 5
Start page 618
End page 635
Total pages 18
Publisher Emerald Publishing Group
Place of publication Bingley, Eng.
Publication date 2017-09-11
ISSN 1754-243X
1754-2448
Keyword(s) BRIC
US
contagion
portfolio management
Summary PurposeThis paper aims to attempt to re-capture the stock market contagion effect from the US to the BRIC equity markets during the recent global financial crisis in a multivariate framework. Apart from this, the study also identifies optimal portfolio hedging strategies to minimize the underlying portfolio risk during the period undertaken for the purpose of study.Design/methodology/approachTo account for the dynamic interactions, the study uses vector autoregression (p) dynamic conditional correlation (DCC)-asymmetric generalized autoregressive conditional heteroskedastic (1,1) model in a multivariate framework, coupled with a monthly heat map relating to the co-movement between the US and the BRIC equity markets during the period 2007-2009. Finally, by following the studies, Hammoudeh et al. (2010) and Syriopoulos et al. (2015), the time-varying optimal portfolio hedge ratios and weights are computed.FindingsThe results report a contagion impact of the US subprime crisis (following the collapse of the Lehman Brothers) on the Indian and Russian stock markets only. On the other hand, a higher degree of interdependence between the US and Brazilian market has been observed. The US and Chinese equity markets indicate a relatively lower level of interdependence among themselves. The optimal hedge ratios are found to be most effective for a portfolio comprising the US and Chinese stocks even during the crisis period. A US investor should invest approximately 30 cents in the Indian market and rest of the 70 cents in the US market in a US$1 portfolio to minimize the portfolio risk without lowering the expected returns. During the crisis period (2007-2009), the optimal portfolio weights indicate a higher weightage to the BRIC stocks.Practical implicationsThe results support the construction of optimal US–BRIC stock portfolios and provide an insight to the investors and policy makers both domestic as well as international, with regard to the contagion impact and interdependence, especially during a crisis period.Originality/valueThe study uses a DCC model in a multivariate framework instead of bivariate, wherein all the markets are factored into a single interaction framework across a very long period (2004-2014). Second, a heat map of monthly correlation combinations has been created for the period 2007-2009, to comprehend the contagion impact or interdependence among the markets. Finally, the study ascertains time-varying optimal hedge ratios and portfolio weights for a two asset portfolio, from a US investor viewpoint, making the study first of its kind in all the perspectives.
Language eng
DOI 10.1108/IJLMA-03-2016-0026
Indigenous content off
Field of Research 15 Commerce, Management, Tourism and Services
18 Law and Legal Studies
HERDC Research category C1.1 Refereed article in a scholarly journal
ERA Research output type C Journal article
Persistent URL http://hdl.handle.net/10536/DRO/DU:30150397

Document type: Journal Article
Collections: Faculty of Business and Law
Department of Finance
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