The Impact of BRICS Formation on Portfolio Diversification: Empirical Evidence from Pre- and Post-Formation Eras

Al Mohamad, S, Rashid, A, Bakry, W, Jreisat, A, Vo, X, (2020). The impact of BRICS formation on portfolio diversification: empirical evidence from pre- and post-formation eras. Cogent Economics & Finance, Vol 8, No 1.

32 Pages Posted: 5 Dec 2019 Last revised: 8 May 2020

See all articles by Somar Al-Mohamad

Somar Al-Mohamad

American University of Middle East. Kuwait

Audil Khaki

American University of the Middle East; American University of the Middle East

Walid Bakry

Western Sydney University

Ammar Jreisat

Al Ain University of Science and Technology

Xuan Vinh Vo

University of Economics Ho Chi Minh City

Date Written: September 30, 2019

Abstract

This paper aims at contributing to the international portfolio investment decisions among the emerging BRICS countries where individual and institutional investors seek diversification benefits and to help in advocating policy changes and implementation as a response to the changing dynamics in these countries pre- and post-BRICS formation. Therefore, the context of this paper is aimed towards examining the short term causalities and long term integration among the BRICS stock market pre- and post-BRICS formation. The research applies the Augmented Dicker-Fuller (ADF) and Philips-Perron tests (PP) tests to analyze stationarity among the selected variables. The pre- and post-BRICS formation long-term linear relationship is investigated using Johansen and Juselius cointegration test while the Granger Causality is applied to assess the direction of the causality between the stock market indices. The study also extends the investigation by employing the impulse response function and variance decomposition to evaluate the reaction of each of the BRICS market to a shock from other BRICS stock markets. Weekly stock market indices of BRICS countries were used covering the period from January 2003 to December 2018. One key finding is that the degree of financial integration among the BRICS stock markets has moderately strengthened in the post-BRICS formation period compared to the pre-BRICS formation period. Another significant finding is that the Chinese stock market are mostly independent from other BRICS markets in the two aforementioned sub-periods, implying diversification benefits for the international investors both in the short and the long run. Further, the results also reveal a unidirectional causal relationship from the Russian stock market to its BRICS counterparts in both periods. Finally, the overall results show an increased responsiveness of stock markets in BRICS countries to shocks in each other after the formation of the bloc as compared to pre- formation period.

Keywords: BRICS, Financial integration, Johansen-Juselius cointegration test, Granger causality, Portfolio diversification, Impulse response Function, Variance Decomposition Analysis.

JEL Classification: C58, F36, G11, G15

Suggested Citation

Al-Mohamad, Somar and Khaki, Audil Rashid and Bakry, Walid and Jreisat, Ammar and Vo, Xuan Vinh, The Impact of BRICS Formation on Portfolio Diversification: Empirical Evidence from Pre- and Post-Formation Eras (September 30, 2019). Al Mohamad, S, Rashid, A, Bakry, W, Jreisat, A, Vo, X, (2020). The impact of BRICS formation on portfolio diversification: empirical evidence from pre- and post-formation eras. Cogent Economics & Finance, Vol 8, No 1., Available at SSRN: https://ssrn.com/abstract=3490569 or http://dx.doi.org/10.2139/ssrn.3490569

Somar Al-Mohamad (Contact Author)

American University of Middle East. Kuwait ( email )

Block 6, Building 1
Egaila
Kuwait
2225 1400 (Phone)

Audil Rashid Khaki

American University of the Middle East ( email )

250 St.
Block 3, Building 1
Kuwait, Kuwait 15453
Kuwait
+965 2225 1400 (Phone)
+965 2225 1400 (Fax)

HOME PAGE: http://aum.edu.kw

American University of the Middle East ( email )

Eqaila
Kuwait
Kuwait, Ahmadi 15453
Kuwait
+965 2225 1400 (Phone)
+965 2225 1400 (Fax)

HOME PAGE: http://www.aum.edu.kw

Walid Bakry

Western Sydney University ( email )

Sydney
1 Parramatta Square, 169 Macquarie Street, Parrama
Sydney, 2751
Australia
2 9685 9372 (Phone)

Ammar Jreisat

Al Ain University of Science and Technology ( email )

Abu Dhabi, Al Ain
United Arab Emirates
24444696 (Phone)

Xuan Vinh Vo

University of Economics Ho Chi Minh City ( email )

Ho Chi Minh City, Ho Chi Minh City
Vietnam

HOME PAGE: http://www.ueh.edu.vn

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