Time-Frequency domain analysis of investor fear and expectations in stock markets of BRIC economies

Owusu Junior, Peterson Adam Anokye Mohammed Asafo-Adjei Emmanuel Boateng Ebenezer Hamidu Zulaiha Awotwe Eric

The purpose of this study is to provide insight into the lead-lag relationships between the BRIC stock index and its constituents. In addition, we assess the comovements between the US volatility index (VIX) as a measure of investor uncertainty and fear and stock returns of BRIC economies. Therefore, the bi-wavelet and wavelet multiple correlations approaches are utilised. Findings from the bi-wavelet technique indicate that there are high interdependencies between the BRIC index and its constituents throughout the time-frequency domain. In addition, comovements between the BRIC index and its constituents was positive and significant. Notwithstanding, we find the BRIC index to be the first variable to respond to shocks when all the study variables were considered in the wavelet multiple cross-correlations. Similarly, the stock market of Brazil is the next to respond to shocks. On the other hand, the stock market of Russia lags in the long-term when the BRIC index was excluded from the wavelet multiple cross-correlations. We also find a uni-directional causality between the VIX and the BRIC stocks in the medium-, and long-term. Specifically, the US VIX significantly drives the BRIC stocks and considered to be negative. Findings from the study imply that global investors can select any of the stock markets in BRIC to allocate their investments due to their strong interdependencies which may facilitate trade and investments. However, portfolio diversification, safe haven and hedge benefits within this region may be minimal due to their high integration with the BRIC index which demonstrates positive significant comovements. The findings present pertinent inferences for portfolio diversification, policy decisions, investing risk and risk management schemes. It is recommended that investors hedge against volatilities in the BRIC stock markets using the US VIX.