Investigating the Decoupling Theory: The Case of BRIC and CIVETS Markets

80 Pages Posted: 23 Oct 2016

Date Written: September 14, 2013

Abstract

Until recently, emerging countries were considered to be the most dynamic and fast growing economies. Some of these markets have already reshaped the global economy and offered unparalleled potential growth for coming decades. Beforehand, emerging markets were able to sustain this growth despite financial turmoil and it was argued that they are not fully connected to financial flows of developed markets. However, since Ben Bernanke, chairman of the Federal Reserve raised the subject of tapering the Federal Reserve’s asset purchasing programme in May 2013, emerging markets equities have particularly underperformed developed market equities. Since the understanding and quantifying the evolution of financial instruments co-movements is critical for asset pricing and portfolio allocation, this paper is set to investigate the structure of interdependencies between the BRIC, the CIVETs and the U.S. stock markets within an empirical framework combining bivariate and multivariate cointegration and error correction modelling over the last twelve years. Hence, we show that stock index prices from BRIC and CIVETS do not share a long-term relationship with the index prices from the U.S., suggesting that the case for the decoupling theory is remaining intact. This result has strong implications for hedging and trading strategies since the identification of causal links among stock markets is useful to achieve international diversification and thus to reduce market risk.

Keywords: decoupling theory, emerging, frontier, diversification, cointegration, bivariate, multivariate

JEL Classification: C58, G15

Suggested Citation

Akallal, Kenza, Investigating the Decoupling Theory: The Case of BRIC and CIVETS Markets (September 14, 2013). Available at SSRN: https://ssrn.com/abstract=2856028 or http://dx.doi.org/10.2139/ssrn.2856028

Kenza Akallal (Contact Author)

BlackRock, Inc

55 East 52nd Street
New York City, NY 10055
United States

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