Volatility spillover of selected international commodity prices on the financial markets of the BRICS countries

M.Com. (Financial Management)Abstract: This study aims to investigate if oil and natural gas price volatility can be used to explain movements in the BRICS financial markets. The study examined the impact of oil and gas prices on equity and foreign exchange markets for Brazil, China, India, Russia and South Africa over the period from January 2011 to October 2016. Several tests were conducted and the results indicated the presence of cointegration which means that there are long run relationships among the variables. This led to the VECM being selected as the appropriate model. Granger causality, impulse response and variance decomposition analyses were also conducted. Through all these analyses, natural gas prices were found to have an insignificant impact on BRICS equity markets and exchange rates. While the gas price impact was insignificant, oil prices were found to Granger cause Russia, China and South Africa’s equity markets as well as the exchange rates in Russia, India and China ceteris paribus. BRICS equity markets responded positively to oil shocks but a negative response was observed with exchange rates. The variance decomposition analysis revealed gas prices contribution to BRICS exchange rates and equity markets is negligible. Furthermore, the impact of oil shocks was relatively large for Brazil’s equity market. The study concludes that natural gas price changes cannot be used to explain the volatility in BRICS financial markets while oil price volatility has a spill over effect on BRICS countries with most of the volatility affecting Brazil’s equity market