Dependence analysis in BRICS stock markets : a vine copula approach

Abstract : This study makes use of three types of vine copulas, c-vine, d-vine and r-vine copulas, to investigate the dependence structure in the BRICS stock markets using daily stock market price data spanning from 28-12-2000 to 10-08-2018. To account for the dynamic effects in dependence measures, the study divides the sample period into three sub-samples: the pre-crisis period (from 28-12- 2000 to 31-01-2007), the crisis period (from 01-02-2007 to 29-12-2011), and the post-crisis period (from 04-01-2012 to 10-08-2018). The price data is first converted to return series and filtered using different ARIMA-GARCH models in order to remove the autocorrelation and heteroscedasticity effects. During this process, it was found that most of the return series exhibited leverage effects, an indication that bad news in the stock markets leads to larger spikes in volatility than good news does. To understand the implication of this effect on the dependence structure of stock markets in the BRICS countries, the c-vine, d-vine and r-vine copulas are used. The use of vine copulas has some significant advantages over traditional copulas as they model the dependence in the BRICS using pairwise copula constructions. The results show that the three types of vine copula models suggest that Student’s t and the SBB7 copulas best describe the dependence structure in the BRICS markets. Unlike other studies, our findings show the existence of a very strong dependence between South Africa and Russia, South Africa and India, and South Africa and Brazil during the pre-crisis, the crisis and the post-crisis periods, suggesting a financial integration between these three countries. Furthermore, we find strong dependence between China and the rest of BRICS markets only during a financial crisis. The study identifies two types of dependence in the BRICS stock markets: the first is among small economies (South Africa, Brazil and Russia) and the second one among large economies (China and India). Small economies tend to co-move during bull and bear markets while large economies co-move with the rest only during bear market periods.M.Com. (Financial Economics