Timescale-dependent stock market comovement: BRICs vs. developed markets

This paper examines the differences in the asset return comovement of the BRIC countries (Brazil, Russia, India and China), the other developed economies in their regions (Canada, Hong Kong and Australia) and the major industrialized economies (the U.K., Germany and Japan) with respect to the U.S. f...

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Bibliographic Details
Published in:Journal of empirical finance 2014-09, Vol.28, p.90-103
Main Authors: Lehkonen, Heikki, Heimonen, Kari
Format: Article
Language:English
Subjects:
Australia
Brazil
BRIC
Canada
China
Comovement
Correlation
Design
Development
Difference
Diversification
Dynamic conditional correlation
Germany
Hong Kong
India
International stock markets
Japan
Russian Federation
Stock exchange
Stock returns
United Kingdom
Wavelets
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Summary:This paper examines the differences in the asset return comovement of the BRIC countries (Brazil, Russia, India and China), the other developed economies in their regions (Canada, Hong Kong and Australia) and the major industrialized economies (the U.K., Germany and Japan) with respect to the U.S. for different return periods. The novelty of the paper is that the stock return indices are decomposed to several timescales using wavelet analysis and that the results are further used as inputs for the dynamic conditional correlation (DCC) framework, which is used as a measure of comovement. The results propose that the level of stock market comovement depends on regional aspects, the level of development and especially on the timescale of returns. These factors should be carefully considered in designing internationally diversified portfolios. The BRICs provide some portfolio diversification benefits, but it is not justifiable to treat all BRICs as a homogeneous group of emerging economies in terms of stock market comovement. •Stock return series are decomposed into different timescales with wavelets•The co-movement between timescales is studied for several markets•The strength and dynamicity of the co-movement depend on the timescale•For lower (higher) timescales regional (development) factors dominate•BRICs cannot be treated as a single homogeneous group in terms of correlation
ISSN:0927-5398
1879-1727
DOI:10.1016/j.jempfin.2014.06.002