Abstract
Advances in portfolio optimization techniques have given rise to studies that aim to identify changes in correlation structures between markets in times of economic turmoil. This phenomenon is known as contagion. This study aims at providing a new approach to distinguish between contagion and interdependence, where interdependence occurs when the correlation between two assets is not significantly different in tranquil and turmoil markets. An R-vine Copula approach is considered to estimate the dependence structures and bivariate copulas between the estimated volatility of different markets. Thereafter, the tail dependence coefficients are estimated and a simulation procedure is used to determine their levels of significance. This study also focusses on contagion and interdependence structures at a sectoral rather than an aggregated level of stock exchanges. Thus, the study analyses the contagion and interdependence structures of the Financial, Industrial and Resource sectors of all the BRICS countries, i.e. the sectors of Brazil, Russia, India, China and South Africa. The estimated models indicate only a limited amount of contagion and interdependence events. This is in line with other authors who found that the BRICS economies can be seen as a heterogeneous asset class. In cases where there is strong co-movement, interdependence rather than contagion is observed. This suggests that strong market co-movements during periods of financial shock may be a continuation of strong cross-market linkages, i.e. interdependence, instead of contagion. The models also indicate that South Africa seems to be decoupled from the other BRICS nations. This supports the continuous narrative that care should be taken if one wishes to group South Africa with the other BRICS nations.
M.Com. (Financial Economics)