Abstract
During the past two decades, financial markets across the globe have experienced sporadic waves of crashes, raising concerns about the vulnerability of the global financial markets and the transmission mechanisms of shocks beyond borders. This minor-dissertation attempts to investigate the co-movement of stock markets in the BRICS nations (Brazil, Russia, India, China, and South Africa) and the United States (US) and their vulnerability to contagion effects during the recent major financial crises. The innovative approach used in the current work consists of performing wavelet transformation on return-series to determine the multi-horizon nature of co-movement, whether it is caused by pure contagion or interdependence and the dynamics of market integration. It further examines the lead-lag relationships among stock markets. It was found that before the 2006 US housing bubble, shocks were transmitted via pure contagion, thereby generating short-term shocks, in contrast to the 2007/2009 US subprime crisis and the 2010/2013 European Union sovereign debt crisis, which showed evidence supporting independence. Furthermore, when analysing the episodes of market integration, it was discovered that, in general, the presence of short- and long-term integration has deepened and strengthened correlations among equity markets. From a portfolio-diversification and risk-management perspective, these results indicate that the market in China provides fruitful ground for short-run investors from the other countries included in the current study. They also suggest that opportunities for benefits are lost for long-term investors owing to the interdependence that continually exists between states and which is enhanced by improvement in economic integration and trade linkages.
M.Com. (Financial Economics)