International Review of Financial Analysis 59 (2018) 117–133

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International Review of Financial Analysis

journal homepage: www.elsevier.com/locate/irfa

Heterogeneous dependence and dynamic hedging between sectors of BRIC T

and global markets
⁎
Wasim Ahmada, Anil V. Mishrab, Kevin Dalyb,
a
Indian Institute of Technology Kanpur, Kanpur, UP 208016, India
b
School of Business, Western Sydney University, Locked Bag 1797, Penrith, NSW 2751, Australia

A R T I C LE I N FO A B S T R A C T

JEL classification: This study examines the dynamic dependence structure via return and volatility spillovers between BRIC (Brazil,
Spillover index Russia, India, and China) and global markets (USA, Europe, and World) at sectoral level. Using directional
dynamic conditional correlation spillover and dynamic conditional correlation models, we find that there is substantial evidence of heterogeneity
dynamic hedging across sample sectors within BRIC and between BRIC and global indices. The sectors that exhibit high inter-
sectoral spillover
country spillovers are industrial metal & mining, banking, industrial transportation and oil & gas. The regional
Keywords: and global indices represented by Europe and World show better spillover mechanism than any other indices,
C32 implying that these global sectoral indices impact the sectoral indices returns of BRIC markets. The dynamic
C58
hedge ratios and portfolio weights suggest that among BRIC, the sectoral indices of China and India provide
G1
better opportunities for risk management than Brazil and Russia. We thus conclude that the heterogeneous
dependence structure makes BRIC as a diverse asset class from strategic asset allocation perspective.

1. Introduction capitalization of Europe, Middle-East and Africa of about 1200 trillion

Under emerging market setting, this study not only examines the
time-varying dependence of four most active and vibrant stock markets
represented by Brazil, Russia, India and China (BRIC) with the global
stock markets (US, Europe and World) at sectoral level but also pro-
vides a detailed account of attractiveness of these sectors from hedging
and portfolio diversification perspectives. We examine five sectors of
sample stock markets, which include aerospace, banking, electricity,
industrial metal & mining, industrial transportation and oil & gas.1 The
rationale of this study is based on three formidable reasons in the
context of BRIC markets. Firstly, the role of BRIC in driving the global
business and financial cycles. The high inflow of foreign capital and
robust economic growth has brought these economies to the forefront
of global growth and prosperity. BRICS countries enjoy a relatively
larger share in international financial transaction compared to many of
their peers. According to Bouri, Gupta, Hosseini, and Lau (2018), the
total market capitalization of BRICS economies was 12,809 trillion USD
in 2015, significantly larger than the total combined market
USD. The high similarity at the level of financial and economic devel-
opments also uniquely places these economies as a homogenous asset
class (see Ahmad & Sehgal, 2015). From a sectoral analysis perspective,
BRICS countries have the higher share in the demand-supply of globally
traded commodities compared to their peers. For instance, BRIC
economies have a relatively larger share in the consumption and pro-
duction of crude oil and metals. According to World Bank (2015), be-
tween 2001 and 02 to 2011–12, China and India observed the con-
sumption growth of metals around 329.2% and 136.9%, respectively.
Similarly, the growth in consumption of crude oil during the same
period has been 97.8% and 52.6%, respectively. The strong jump in the
demand of metal and crude oil was supported by the high industrial
growth of China (298.3%) and India (112.5%) during 2001–02 to
2011–2012, a much higher than the rest of the world and global in-
dustrial growth of 14.6% and 34.5%, respectively. Among BRICS na-
tions, Russia is the only country which is the net exporter of crude oil.
These figures are further magnified by the fact that according to IMF
(2014), a 1% decline in economic growth of emerging economies leads

⁎
Corresponding author.
E-mail addresses: wasimad@iitk.ac.in (W. Ahmad), A.Mishra@westernsydney.edu.au (A.V. Mishra), k.daly@westernsydney.edu.au (K. Daly).
1
The outcome of this study may be useful for international portfolio managers, hedgers and regulators. Although Heston and Rouwenhorst (1994, 1995) suggest
the mutual benefits of geographical and industrial diversification. They suggest two characteristics of such investment exposures: First, geographical diverisification
is more advantageous than the industrial diverisfication. Second, cross-country diversification within an industry has superior risk reduction benefits than the
industry diversification within a country. In our study, we take into account both the suggestions as our study is not only a cross-country study but also cross-country
within an industry which in turn fulfills the criterion of top-down approach of investment.

https://doi.org/10.1016/j.irfa.2018.07.005
Received 19 October 2017; Received in revised form 18 June 2018; Accepted 3 July 2018
1057-5219/ © 2018 Elsevier Inc. All rights reserved.
W. Ahmad et al.
to about 9% decline in global metal prices. With the financialization of
commodities and emergence of a strong network of stock exchanges,
the financial markets of BRICS have garnered global attention. Ac-
cording to Syriopoulos, Makram, and Boubaker (2015), the financial
and industrial sectors have the largest share in the aggregate market
capitalization and it is expected to grow at a faster rate as BRICS
economies are aggressively implementing the economic liberalization
measures. These characteristics outline unique avenues to examine the
strength of connections of BRIC with major global stock markets.
Secondly, the 2008 Global Financial Crisis (hereafter, GFC) has
added one more dimension to the dynamism of BRICS economies. That
is, how these economies were impacted by the adverse shocks of GFC
events including 2008 GFC and its aftermath. The empirical evidence
suggests that the BRICS economies experienced a moderate level of
contagion compared to their peers.2 The significant studies in this
strand include Baur and Fry (2009), Aloui, BenAïssa, and Nguyen
(2011), Samarakoon (2011), Celik (2012), Metiu (2012), Ahmad,
Sehgal, and Bhanumurthy (2013), Dimitriou, Kenourgios, and Simos
(2013), Bianconi, Yoshino, and de Sousa (2013), Bekaert, Ehrmann,
Fratzscher, and Mehl (2014), Bekiros (2014), Mensi, Hammoudeh,
Nguyen, and Kang (2016), Jin and An (2016), Mensi, Hammoudeh, and
Kang (2017), Boamah (2017), Bhuyan, Robbani, Talukdar, and Jain
(2016), Balcilar, Bonato, Demirer, and Gupta (2018), Sewraj, Gebka,
and Anderson (2018), Bonga-Bonga (2018). A close overview of these
studies provides mixed empirical evidence as far as the intensity of
contagion effect of GFC on emerging markets is concerned.
Thirdly, some studies have also examined the risk spillover and
portfolio diversification effectiveness of emerging markets via-a-vis
developed markets at a sectoral level during different phases of 2008
GFC. Although there is no common consensus on the intensity of the
impact of 2008 GFC, the analysis provides the immense scope of in-
vestigation by accounting the major developments post-GFC. In this
strand, the influential studies include Baur (2012), Kenourgios,
Christopoulos, and Dimitriou (2013), Bekaert et al. (2014), Kenourgios
and Dimitriou (2015), Syriopoulos et al. (2015). A brief overview
suggests in favour of no contagion of emerging markets from GFC under
multi-country set-up except Kenourgios and Dimitriou (2015) who re-
ported the evidence of contagion effect of GFC at global and regional
levels. The sectoral analysis also suggests the same. Baur (2012) reports
no contagion effect emanating from 2008 GFC to financial and non-
financial sectors for BRICS countries except consumer goods sector in
Russia. The findings of Kenourgios et al. (2013) also report the same
and provide the evidence of decoupling of BRIC stock markets from
GFC. In the same vein, Bekaert et al. (2014) report similar outcome and
suggest that the sectors such as banking and trade played no meaningful
role in the spread of contagion. However, Kenourgios and Dimitriou
(2015) find that the energy, utilities, basic materials were the most
vulnerable sectors, whereas, telecommunications, consumer goods, in-
dustrial and healthcare experienced the limited contagion effect of GFC.
On BRICS, Syriopoulos et al. (2015) provided the first sectoral level
empirical evidence by examining the business sector comprising fi-
nancial and industrial sectors of BRICS with the USA. Using constant
conditional correlation, the study reports significant return and vola-
tility spillovers between BRICS and the US business sectors. From
portfolio diversification perspective, the study suggests that the in-
dustrial stocks of Brazil and financial stocks of Russia provide better
diversification experience than the US stocks.
Overall, what we find that while, we have an understanding of the
intensity of stock market integration of emerging or BRICS stock mar-
kets with global and regional markets including the contagion literature
on 2008 GFC and even at sectoral level, what is missing in the literature
2 4
Contagion is a phenomenon that captures extreme interdependence be-
tween stock markets or any financial asset class during crisis event (see Ahmad
et al., 2013).
118
International Review of Financial Analysis 59 (2018) 117–133
is an in-depth analysis of not only the magnitude and direction of de-
pendence but also the confirmation of earlier studies by taking into
account the post 2008 GFC events including the 2015–2016 energy
price decline. Such analysis may help decipher the contagion and de-
coupling dynamics of BRIC and provide a direction for strategic
asset allocation and portfolio investment. Methodologically, so far most
studies on contagion and market integration have relied on risk-ad-
justed conditional correlation and distribution based model such as
Copula, which simply provides the significance and direction of spil-
lover moving from one market to another under time-varying frame-
work, what is more important in a contemporary context to not only
study the direction but also the magnitude of spillover under static and
dynamic frameworks. The analysis of network-based variance decom-
position model in this regard has a great significance compared to the
correlation models. Another dimension that needs immediate attention
is the confirmation of the results of Syriopoulos et al. (2015) on hedging
and portfolio diversification of BRICS at sectoral level. The present
study attempts to fill all these voids.
The present study contributes to the literature in the following
manner. Firstly, it complements the literature by examining not only
the market integration and extreme independence via return and vo-
latility spillovers between BRIC and global equities markets but also
appraise about the extent of equity market integration that BRIC enjoys
with these indices. The examination of sectors may further help gauge
the hedging and portfolio diversification opportunities available in
BRIC. From a methodology point of view, the major contribution comes
from the application of network-based directional spillover model
proposed by Diebold and Yilmaz (hereafter DY, 2012 & 2014).3 The
method has several advantages over heteroscedasticity and distribu-
tion-specific models such as multivariate generalized autoregressive
conditional heteroscedasticity (MGARCH) and Copula models. The DY
approach helps identify the direction and magnitude of spillover
moving from one market to another. The network plots of DY model
further amplify the static and dynamic return and volatility spillovers
without considering the variables ordering in the vector auto-regression
set-up. It is entirely a new value addition to the literature. Further, in
the next step, the study applies the dynamic conditional correlation
(DCC) model propounded by Engle (2002) which has a comparative
advantage over other variants of MGARCH models such as Baba, Engle,
Kraft and Kroner (BEKK) and vectorised conditional variance (VEC)
models.4 The study also uses the conditional variance and conditional
covariance series to calculate the time-varying hedge and portfolio
weights of the sectoral series, firming a major contribution in the
context of efficient hedging and portfolio diversification.
We find that there is a strong information transmission between
BRIC and global indices, especially in industrial metal & mining, oil &
gas and banking sectors. Within BRIC, we find a lot of heterogeneity on
directional returns and volatility spillovers. These results suggest that
BRIC cannot be considered as a homogeneous asset class as perceived
by investors throughout the world. It also justifies the fact that BRIC
countries are heterogeneous from their socio-economic set-up and
geography.5 Our findings are in line with Ahmad and Sehgal (2015)
who report similar outcomes in case of BRIICKS equity markets. Within
BRIC; Brazil, and Russia exhibit higher informational spillover com-
pared to India and China.
Further, the global indices appear to be the net transmitters of
3
In the past, several studies have applied this model on different asset class,
energy and commodities. A broad list of studies includes Sehgal, Ahmad, and
Deisting (2015), Antonakakis and Kizys (2015), Ahmad (2017), Ahmad, Rais,
and Shaik (2017), Ahmad, Mishra, and Daly (2018), Singh, Ahmad, and Anil
(2018), Chevallier, Nguyen, Siverskog, and Uddin (2018) and Lundgren,
Milicevic, Uddin, and Kang (2018).
Scherrer and Ribarits (2007).
5
Delcoure and Singh (2016) state that BRIC countries are very diverse eco-
nomically.
W. Ahmad et al.
return and volatility spillover to most of the sectoral indices of BRIC,
implying that the risk arising from these sectors can transmit into
sample sectors of BRIC. Based on time-varying conditional correlations,
the calculated hedge ratios and portfolio weights indicate that BRIC
sectoral indices seem to provide better portfolio diversification oppor-
tunities when they are paired with the World and European sectoral
indices. Further, US sectoral indices provide equally good diversifica-
tion opportunities when combined with Chinese and Indian sectoral
indices. Within BRIC, China and India provide better hedging and
portfolio diversification opportunities than Brazil and Russia.
The remainder of this study is structured as follows: Section 2
provides a brief literature review on the sector-wide volatility spil-
lovers. Section 3 explains data followed by empirical models in Section
4. Section 5 reports empirical results and the study ends with a con-
clusion in part 6. Some of the tables in the subsequent sections will also
be referred to the online appendix.
2. Brief literature review
There is a sparse literature that examines volatility transmission
among sectors. This section provides a brief literature review on spil-
lover effects at sectoral level. Syriopoulos et al. (2015) investigate the
dynamic risk-return properties of the BRICS capital markets and model
possible time-varying correlations and volatility spillover effects with
the US stock market. They identify significant return and volatility
transmission dynamics between the US and BRICS stock markets and
business (industrial and financial) sectors. Balcılar, Demirerc, and
Hammoudehd (2015) examine the international diversification benefits
of bloc-wide equity sectors in the Gulf Cooperation Council (GCC)
countries by comparing alternative spillover models that encompass
local, regional and global factors. Some GCC-wide equity sectors/sub-
sectors are found to display segmentation from the world markets
during periods of high and extreme market volatility, and thus serve as
safe havens for international portfolio investors during such periods.
Balli, Balli, and Louis (2013) examine the spillover effects of local and
global shocks on Gulf Cooperation Council (GCC) –wide sector equity
returns. They find that GCC-wide sector returns have asynchronous
responses to global and regional shocks. They also find that portfolios
diversified across GCC-wide sectors perform better than portfolios di-
versified across GCC national equity markets. Balli, Basher, and Louis
(2013) investigate the integration of the Euro- and US-wide sector
equity indices by focusing on the return, volatility, and trend spillover
effects of local and global shocks. They find that unlike volatility spil-
lovers, return spillovers are not significant enough to explain sector
equity returns. They also show that when the trend-based volatility
spillover model is used, some sector equity indices tend to react simi-
larly to local and global shocks.
Hammoudeh, Yuan, and McAleer (2009) use a multivariate VAR
(1)-GARCH (1,1) to examine the dynamic volatility and volatility
transmission for the service, banking and industrial/insurance sectors
of Kuwait, Qatar, Saudi Arabia and the United Arab Emirates (UAE).
They find that own past volatilities matter more than previous shocks
and there are moderate volatility spillovers between the sectors (ser-
vice, banking, and industrial/or insurance) within the individual
countries, except Qatar. They also find that the optimal portfolio
weights favour the banking/financial sector for Qatar, Saudi Arabia and
the UAE, and the industrial sector for Kuwait. In a similar sectoral
volatility transmission study, Benjelloun (2009) do not find good op-
portunities for portfolio diversification across the Qatar and UAE sec-
tors. Hassan and Malik (2007) employ a multivariate GARCH model to
simultaneously estimate the mean and conditional variance using daily
returns among different US sector indices from 1992 to 2005. They find
the significant transmission of shocks and volatility among the various
sectors. Brooks and Negro (2004) and Kraus (2001) show that equity
market segments do not respond similarly to local and global shocks.
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International Review of Financial Analysis 59 (2018) 117–133
3. Data
In this study, we use weekly data on six sectoral indices of BRIC,
USA, World and European countries. The sample sectors are Aerospace,
Banking, Electricity, Industrial Metal & Mining, Industrial
Transportation and Oil & Gas. The data of all indices are in dollar terms.
For return analysis, we have converted all sample series into loga-
rithmic differences. The study period is from 23 June 2003 to 14 March
2016. We have downloaded the sample data from Thomson DataStream
database.6
Table 1 reports the summary statistics of returns for all sample
series. We can infer that the mean returns of all sectoral indices are
smaller than their standard deviations, suggesting no significant trend
in the data. However, the average return of three indices viz., banking
(USA), electricity (Russia) and industrial transportation (USA) are ne-
gative. The mean weekly returns of the sample equity indices range
from −0.17% (electricity sector in Russia) and 0.35% (industrial
transportation sector in Russia). The values of skewness for all the
sample series appear to be negative with some exceptions for BRIC. The
values of Kurtosis are substantially higher indicating excess kurtosis.
Consequently, the Jarque-Bera test suggests that all return series are
non-normal. The Ljung-Box (1978) test for serial correlation Q and Q2
(for squared returns) exhibits mixed results about the presence of serial
correlation in returns. The significance of squared returns provides
substantial evidence for second-moment serial correlation. To examine
this, we have also conducted the Autoregressive Conditional Hetero-
scedasticity (ARCH) test. The results exhibit the case of volatility
clustering in the case of all series except India and Russia in the aero-
space sector. The results of unit root tests Augmented Dickey and Fuller
(ADF) exhibit that all sample return series achieve stationarity on their
level. It appears that there is clear evidence of clustering effect in the
data, indicating for the application of second-moment models.
4. Empirical models
4.1. Directional spillover model
The directional spillover model that has the characteristics to de-
cipher not only the directional dependence but also the extent. The
peculiar feature of this model is that the pairwise directional spillover
can further be represented by the networks which exhibit the extents of
direction and magnitude through nodes and edges. In recent years, the
methodology is used by various studies on different financial assets and
commodities. The DY framework is implemented in three steps: In the
first step, we estimate the vector autoregression (VAR) model for the
sample variables and calculates the forecast-error-variance-decom-
position (FEVD) in the second step. In the third step, we further cal-
culate the static and dynamic total and pairwise spillovers from gen-
eralized FEVD. We briefly define the DY method in the following
manner:
Let us consider a generalized covariance-stationary VAR (p) model
p
with p-variable, i.e. Yt = ∑ ψi Yt − i + et , where et~i. i. d(0, Σ) is a P × 1
t=1
vector of residuals. We then derive the MA (moving average) from es-
∞
timated residual and re-specify it as Yt = ∑ Aj εt − j , where the P × P is a
j=0
coefficient matrix. However, here Aj follows the recursive pattern as
Aj = ψ1Aj−1 + ψ2Aj−2 + ⋯⋯⋯⋯ + ψpAj−p A0 is an identity matrix and
Aj = 0 for j < 0. Unlike the previous version of the model in 2009, the
2012 version makes improvement and uses the generalized framework
of VAR model, which is order insensitive to calculate the H-step-ahead
generalized FEVD
6
For further details, please refer https://www.thomsonreuters.com/content/
dam/openweb/documents/pdf/tr-com financial/methodology/global-equity-
index-methodology-oct-2015.pdf (accessed on 5th March 2017).
W. Ahmad et al. International Review of Financial Analysis 59 (2018) 117–133

Table 1
Descriptive statistics.
Mean SD Skew. Kurt JB Q4 Q24 ARCH(4) ADF

Aero_BRZ 0.04 5.41 −0.32 7.37 [0.00]* 4.1 228.2* 36.95* −15.29*
Aero_CHN 0.15 6.76 −0.36 5.30 [0.00]* 1.4 54.5* 14.20* −14.17*
Aero_IND 0.30 5.53 0.11 5.79 [0.00]* 4.0 7.1 1.64 −14.60*
Aero_RUS 0.24 8.90 −1.31 47.36 [0.00]* 9.6 2.4 0.62 −15.11*
Aero_US 0.19 2.85 −0.47 8.79 [0.00]* 4.2 194.2* 37.81* −14.48*
Aero_WOR 0.18 2.74 −0.49 9.54 [0.00]* 6.5 200.1* 39.02* −13.89*
Aero_EUR 0.19 3.25 −0.47 6.50 [0.00]* 25.0* 166.8* 29.98* −14.23*
Bank_BRZ 0.20 5.49 0.16 12.24 [0.00]* 6.1 147.5* 54.54* −14.34*
Bank_CHN 0.13 4.14 0.11 4.62 [0.00]* 17.3* 69.8* 12.93* −15.28*
Bank_IND 0.26 5.55 −0.67 7.50 [0.00]* 9.2 59.3* 11.04* −14.11*
Bank_RUS 0.20 6.20 −0.15 7.87 [0.00]* 4.2 175.9* 30.40* −13.62*
Bank_US −0.05 4.88 0.24 11.16 [0.00]* 27.0* 447.2* 76.91* −15.89*
Bank_WOR 0.00 3.38 −0.53 10.37 [0.00]* 8.8 256.3* 43.99* −14.37*
Bank_EUR −0.07 4.27 −0.54 9.50 [0.00]* 14.1* 217.9* 37.58* −13.46*
Elect_BRZ 0.06 4.70 −0.37 5.88 [0.00]* 11.3 102.9* 18.91* −14.28*
Elect_CHN 0.08 4.42 −0.33 5.49 [0.00]* 0.5 68.0* 12.91* −14.71*
Elect_IND 0.19 5.19 −1.08 12.50 [0.00]* 5.4 48.0* 9.66* −13.98*
Elect_RUS −0.17 6.46 −0.36 7.99 [0.00]* 8.3 62.1* 12.32* −13.50*
Elect_US 0.10 2.28 −0.63 6.85 [0.00]* 8.2 154.1* 27.79* −14.75*
Elect_WOR 0.06 2.17 −0.92 9.93 [0.00]* 9.0 156.9* 34.81* −13.63*
Elect_EUR 0.02 3.07 −0.74 8.16 [0.00]* 16.9* 173.9* 37.29* −13.19*
Met_BRZ 0.03 6.69 0.10 6.80 [0.00]* 6.4 84.1* 21.03* −13.76*
Met_CHN 0.01 5.44 −0.37 4.25 [0.00]* 3.6 74.4* 13.27* −14.16*
Met_IND 0.18 6.36 −0.49 6.44 [0.00]* 6.5 177.5* 34.32* −13.33*
Met_RUS 0.12 6.44 −0.57 12.22 [0.00]* 10.7* 188.1* 36.50* −14.98*
Met_US 0.04 5.53 −0.58 7.33 [0.00]* 8.4 240.5* 46.33* −14.87*
Met_WOR 0.09 4.54 −0.70 9.30 [0.00]* 14.0* 296.3* 62.61* −13.54*
Met_EUR 0.08 5.08 −0.79 9.24 [0.00]* 18.2* 317.4* 55.80* −13.21*
Trans_BRZ 0.33 6.12 −0.47 16.65 [0.00]* 21.7* 106.3* 32.21* −14.12*
Trans_CHN 0.01 4.55 −0.28 5.25 [0.00]* 3.4 84.5* 14.70* −14.57*
Trans_IND 0.27 5.80 0.82 17.98 [0.00]* 7.1 6.2 1.39* −14.72*
Trans_RUS 0.35 11.02 6.31 117.74 [0.00]* 59.6* 74.0* 18.92* −15.59*
Trans_US −0.01 7.17 −0.27 6.99 [0.00]* 1.8 89.4* 17.88* −14.08*
Trans_WOR 0.13 2.79 −0.45 7.94 [0.00]* 3.5 262.4* 48.54* −14.72*
Trans_EUR 0.11 3.16 −0.67 7.53 [0.00]* 16.4* 281.6* 55.25* −13.39*
Oil_BRZ −0.01 7.17 −0.27 6.99 [0.00]* 1.8 89.4* 17.88* −14.08*
Oil_CHN 0.09 4.84 0.21 6.90 [0.00]* 3.8 56.3* 11.82* −14.65*
Oil_IND 0.11 4.93 −0.70 9.93 [0.00]* 5.0 65.1* 11.99* −14.26*
Oil_RUS 0.07 5.68 −0.57 10.33 [0.00]* 15.0* 225.7* 43.89* −14.17*
Oil_US 0.14 3.44 −0.53 6.49 [0.00]* 12.1 100.0* 20.00* −15.52*
Oil_WOR 0.08 3.54 −0.50 8.54 [0.00]* 5.9 176.6* 33.31* −14.64*
Oil_EUR 0.02 3.84 −0.32 9.45 [0.00]* 14.2* 166.3* 29.61* −14.46*

Notes: The table reports the summary statistics for the weekly returns (in %) of the BRIC, USA, World and Europe indices. The following statistics are reported: mean,
standard deviation (SD), skewness (Skew), kurtosis (Kurt), Jarque-Bera (JB) test. Q-statistics is denoted by Ljung and Box (1978) test statistic. Augmented Dickey-
Fuller (ADF) test is used to check stationarity of sample series. * denotes the level of significant 5% and above. Values in [] are p-values of JB statistics. Aero
(Aerospace), Bank(Banking), Elect(Electricity), Met (Industrial, Metal & Mining), Trans (Industrial Transportation), Oil(Oil & Gas) represent sectors. BRZ(Brazil),
RUS(Russia), IND(India), CHN(China), US(United States), EUR(Europe), WOR(World).

H−1
σii−1 ∑h = 0 (e′i Ah ∑ ej )2 ∑Nj = 1 θ͠ ij (H )
θij (H ) = H−1 i≠j
∑h = 0 (e′i Ah ∑ Ah′ ej ) (1) DSj ← i (H ) = × 100
N
∑i, j = 1 θ͠ ij (H )
(3)
where σii is the i element on the principal diagonal of Σ. Since the sum
of each row of θij(H) is not equal to 1, each element of the matrix is Finally, the net spillovers from one variable to another for a set of
normalized by summing the row as θ͠ ij (H ) =
θij (H )
to make sure variables is calculated by taking the difference of Eqs. (2) and (3) as
∑N
j = 1 (θij (H ))
that it sums to unity and decomposition includes shocks of each assets/ NSi (H ) = Si ← j (H )‐Sj ← i (H ) (4)
markets, i.e., ∑j=1N(θij(H)) = 1 and total decomposition of all variables
sums to N i.e. ∑i, j=1N(θij(H)) = N. We calculate total spillover index as
∑N θ͠ (H )
4.2. Dynamic conditional correlation analysis
i, j = 1 ij
i≠j
S (H ) = N
× 100 , that shows the directional spillover moving In this section, we briefly explain the dynamic conditional correla-
from all the series under investigation to the total FEVD. tions calculated from multivariate generalized autoregressive condi-
Similarly, the pairwise return and volatility spillovers received by tional heteroscedasticity (henceforth, DCC-MGARCH) model. Engle
asset/market i from the universe of markets j is calculated as (2002) propounded this model and involved two step-procedure to
obtain the conditional correlation inference. In the first step, we esti-
∑Nj = 1 θ͠ ij (H )
mate univariate GARCH model for each series to obtain the conditional
i≠j
DSi ← j (H ) = N
× 100 variance. In the second step, we calculate dynamic conditional corre-
∑i, j = 1 θ͠ ij (H ) lations from standardised residuals.
(2)
Ht = Dt Rt Dt (5)
and

120
W. Ahmad et al. International Review of Financial Analysis 59 (2018) 117–133

Table 2
Return spillover results.
Brazil China India Russia USA World Europe From others Net spillover

Aerospace sector
Brazil 46 0.1 2.6 0.2 17.8 20 13.3 54 −10.3
China 0.8 90.2 2.4 0.8 1.3 2 2.5 9.8 −5.4
India 4.7 1.7 69.4 0.2 6.3 8.8 9 30.6 −14
Russia 0.2 0.8 0.2 96.7 0.9 0.8 0.4 3.3 −1.7
USA 13.4 0.6 3.1 0.2 34.8 32.3 15.8 65.2 7.4
World 13.5 0.6 3.8 0.1 28.9 31.1 22.1 68.9 22.3
Europe 11.1 0.7 4.6 0.1 17.5 27.5 38.6 61.4 1.8
Contri. To other 43.7 4.4 16.6 1.6 72.6 91.2 63.2 293.3
Contri. Incl. own 89.7 94.6 86 98.3 107.4 122.3 101.8 42%

Banking sector
Brazil 38 3.1 7.5 12.4 6.7 17.9 14.4 62 −5
China 5.9 74.4 3.4 3.6 1.6 6.6 4.4 25.6 −14
India 9.3 2 45.5 7.6 7.5 15.7 12.4 54.5 −15
Russia 12.6 1.8 6.3 38.1 7.9 17.1 16.2 61.9 −7.3
USA 6.4 0.9 6 7.7 36.7 24.1 18.3 63.3 −8
World 12 2.3 8.7 11.4 17.1 25.4 23 74.6 32.3
Europe 10.8 1.5 7.5 11.9 14.5 25.5 28.2 71.8 16.8
Contri. To other 57 11.6 39.5 54.6 55.3 106.9 88.6 413.7
Contri. Incl. own 95 86.1 85 92.7 92 132.4 116.9 59.10%

Electricity sector
Brazil 49.4 1.5 5.8 6.2 8.9 17.3 11 51 −8
China 2.6 84.2 3.1 1.2 2.2 4.2 2.5 16 −9
India 6.4 1.7 53 6.3 5.6 15.7 11.3 47 −11
Russia 7.4 0.8 6.8 55.1 4.2 12.4 13.4 45 −13
USA 8.2 1.1 4.4 3.3 42.4 27.1 13.5 58 −7
World 10.5 1.4 8.7 6.4 19.2 29.6 24.1 70 36
Europe 8 0.9 7.4 8.1 11.5 28.9 35.3 65 11
Contri. To other 43 7 36 32 51 106 76 351
Contri. Incl. own 92 92 89 87 94 135 111 50.20%

Industrial metal & mining sector

Brazil 29.3 2.7 8.1 8.7 16 19.3 15.9 70.7 −5.6
China 5.9 61.6 5 4.4 7.1 9 7 38.4 −24.8
India 9.6 2.2 33.6 10 12.4 17.6 14.6 66.4 −15.5
Russia 8.8 1.5 8.1 31.6 13 17.1 19.9 68.4 −7.2
USA 13.9 2.5 8.8 10.5 25.4 21.2 17.7 74.6 8.6
World 14.3 2.7 11.1 12.4 18.3 21.8 19.5 78.2 26.7
Europe 12.6 2 9.7 15.2 16.4 20.8 23.4 76.6 17.8
Contri. To other 65.1 13.6 50.9 61.2 83.2 104.9 94.4 473.3
Contri. Incl. own 94.4 75.1 84.5 92.8 108.6 126.7 117.8 67.60%

Note: Table illustrates return spillover results. The DY model is estimated using 10-step-ahead-forecast-error variance decomposition. Contri. (contribution). Incl.
(including).

In Eq. (5), Ht is the n × n conditional covariance matrix, Rt is the
dynamic correlation matrix and Dt is a diagonal matrix with time-
varying standard deviations.
Dt = diag (h11t 1/2. …hkkt 1/2)
Rt = diag (q11t −1/2……qkk t −1/2) Qt diag (q11t −1/2……qkk t −1/2)
where Qt is a symmetric positive definite matrix:
Qt = (1 − θ1 − θ2 ) Q + θ1 εt − 1 ε′t − 1 + θ2 Qt − 1
Q is the n × n unconditional correlation matrix of the standardised
residuals εit. The parameters θ1 and θ2 are non-negative with a sum of
less than unity. We calculate the conditional correlation at time t as
qij, t
ρij, t = , ∀ i, j = 1, ..……,n, i ≠ j
qii, t qjj, t
The Quasi-Maximum Likelihood Estimation (QMLE) is used to es-
timate the model.
5. Empirical results
5.1. Return spillover
estimate the DY model using the 10-step-ahead procedure.7 We analyze
return spillover results in three ways. First, we analyze overall return
spillover among sample countries in respective sectoral indices. It will
provide a way to measure the level of information transmission. The
results show that among sample sectors, the magnitude of returns
spillover among sample countries appear to be higher in the case of
industrial metal & mining (67.60%) followed by oil & gas (64.30%),
banking (59.10%) and electricity (50.20%). It implies that the levels of
information transmission are higher in these sectoral indices compared
(6)
to those of aerospace and industrial transportation. From an efficient
market framework, we can interpret that industrial metal & mining
sectors are the most efficient ones followed by oil & gas, banking, and
electricity sectors. From investors' perspective, it further implies that
there are limited hedging and portfolio diversification opportunities if
we combine sectoral indices of industrial metal & mining, oil & gas,
(7) banking, and electricity. These results appear to agree with the study of
Kenourgios and Dimitriou (2015). They find that during initial phases
of GFC, the sectors which experienced the maximum jolt of crisis waves
were basic materials, energy and utilities. These results are further re-
confirmed by Baur (2012) who reports that during GFC the sector
which were most affected were oil & gas and basic materials.

7
Tables 2–3 exhibit the estimated return spillover results. We For VAR estimation, we choose lag length using information criteria.

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Table 3
Return spillover results.
Brazil China India Russia USA World Europe From others Net spillover

Industrial transportation sector

Brazil 48.2 1.5 4.5 1.1 16.5 15.2 13 52 −5
China 2.5 76.9 1.6 0.3 4.9 8.5 5.2 23 −14
India 6.1 0.7 62.5 0.8 7 12.9 10 37 −13
Russia 1.7 0.2 1.2 83.7 3.9 4.7 4.6 16 −8
USA 15.2 2.3 4.8 2 43.5 17 15.2 56 3
World 11.2 3.1 6.8 1.7 13.8 34.7 28.7 65 24
Europe 10.2 1.7 5.4 1.8 13.1 30.7 37.1 63 14
Contri. To other 47 9 24 8 59 89 77 313
Contri. Incl. own 95 86 87 91 103 124 114 44.70%

Oil & gas sector

Brazil 31 2.2 6.2 12 13.7 18.6 16.3 69 −5
China 4.9 69.5 6 3 4.9 6.5 5.3 31 −17
India 9.2 4 45.4 9.7 7.1 12.8 11.8 55 −20
Russia 11.4 1.4 6.3 29.4 11.7 18.4 21.4 71 −4
USA 12.3 2.3 4.3 11 27.7 23.9 18.5 72 1
World 13.7 2.4 6.4 14.3 19.7 22.7 20.8 77 25
Europe 12.6 2 6.2 17.4 16 21.9 23.8 76 18
Contri. To other 64 14 35 67 73 102 94 450
Contri. Incl. own 95 84 81 97 101 125 118 64.30%

Note: Table illustrates return spillover results. The DY model is estimated using 10-step-ahead-forecast-error variance decomposition. Contri. (Contribution). Incl.
(including).

Second, we analyze BRIC results individually. It appears that all
sectoral indices of BRIC exhibit lower levels of return spillover com-
pared to global indices including the USA. For aerospace sector, returns
of Brazil explain the limited amount of forecast-error-variance decom-
positions (FEVDs) of returns of China, India, and Russia. The same is the
case with electricity, industrial metal & mining, industrial transporta-
tion and oil & gas sectors. However, there are few exceptions. For ex-
ample, for the banking sector, returns of Brazil contribute 12.6% to the
FEVD of returns of Russia. While, returns of Russia explain about 12.4%
to the FEVD of Brazilian returns, implying that these sectoral indices
exhibit a relatively higher level of interdependence compared to other
sectoral indices within BRIC. We find similar evidence between returns
of Brazil and Russia in the case of the industrial transportation sector. In
the case of China, it appears that Chinese sectoral returns exhibit lim-
ited return spillover with those of Brazil, India, Russia and USA. The
magnitude of returns spillover is in single digit for most of the sectoral
indices, indicating limited interdependence from China to the rest. For
India, the results exhibit that the magnitude of return spillover is higher
compared to China but still in single digit, indicating the case of limited
information overflow. We find that returns of Russia exhibit greater
interdependence with those of Brazil and India compared to China. For
example, Russia explains around 12% each to the FEVD of Brazil in
cases of banking and oil & gas sectoral indices, while Brazil appears to
explain the similar amount of FEVD of Russian economy indicating a
relatively stronger case of informational spillover compared to other
countries in BRIC. In industrial metal & mining sector, Russia explains
10% to the FEVD of India compared to 8% it received from India.
Finally, we turn to analyze the contributions of global and regional
indices viz., World, USA, and Europe. We find that these indices play a
dominant role in return spillover of BRIC. Considering the case of USA,
it appears that it is the net transmitter of a shock to all sectoral indices
across BRIC, World, and Europe except to banking and electricity sec-
tors, implying that it is one of the important drivers of sectoral returns
in these markets. The magnitude of return spillover is highest in the
case of metal & mining (8.6%) followed by aerospace (7.4%).
Particularly on BRIC, it appears that US sectoral indices are net trans-
mitters of return spillover shock to all sectoral indices. Specifically, US
sectoral indices exhibit higher magnitude of spillover with Brazil and
India as compared to China and Russia in most cases. These results
appear to agree with the study of Aloui et al. (2011) which suggested in
favour of higher dependence for tradable commodities than the export
finished products. Further, the extent of spillover of Brazil from the USA
is in double-digit as compared to China, India, and Russia in most cases.
It implies that the Brazilian economy is more sensitive to the US shocks
than rest of the BRIC. The possible explanation could be because Brazil
is an energy and mineral-driven economy and any variations in the
prices of commodities traded in USA may have negative impact on the
Brazilian stock market. Syriopoulos et al. (2015) report higher spillover
effect of the US industrial sector on Brazil, India and Russia. Particu-
larly for financial sector which includes banking stocks as well, the
study suggests the presence of strong volatility spillover moving from
the USA to Brazil and Russia.
Comparing US sectoral indices with World and Europe, we find that
the USA is the net receiver of return spillover shock from Europe except
for aerospace sector. Similarly, between the USA and world sectoral
indices, the results indicate that US sectoral indices are the receiver of
spillover shock from world sectoral indices, suggesting that these two
indices even play a pivotal role in determining the stock market returns
of USA.
However, we now make a comparison between sectoral indices of
BRIC with global sectoral indices. The results indicate that among all
the three important global indices viz. USA, World and Europe, sectoral
returns of World explain the FEVDs of BRIC sectoral returns more than
any other one. For example, in aerospace and electricity sectors, the
magnitude of net spillover moving from World to all other variables is
highest for World followed by Europe, with the scale ranging between
22.3% and 36%, respectively. Among BRIC sectors, the extent of return
spillover is greatest in the case of Brazil followed by Russia, India and
then China. Surprisingly, the magnitude of return spillover of China is
lowest and remains in single digit across all sectors even when we
compare it with global indices. Lastly, we compare the results of Europe
vis-à-vis BRIC sectoral returns. It appears that Europe's sectoral returns
are the net transmitters of return spillover shocks to all BRIC sectoral
indices, implying that European sectoral indices are one of the im-
portant drivers of informational spillover. It also means that the risk
arising from European stock market will have a strong bearing on BRIC
sectoral indices. It is one of the significant findings of this study.
Finally, on sectors, the within BRIC return spillover scenario sug-
gests that the sectoral indices that exhibit relatively better cross-country
spillovers are banking, industrial metal & mining and industrial trans-
portation. High spillover implies that these sectors will provide limited
hedging and portfolio diversification opportunities. We further find that

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the within BRIC scenario is not very healthy from market integration, as
we find a lot of heterogeneity within sample sectors.8 Russia and Brazil
enjoy a higher level of return spillover compared to China and India in
almost all the sectoral indices except aerospace and electricity. Our
results are in agreement with the study of Aloui et al. (2011) which
reports the heavy commodity centric orientation of Brazil and Russia as
a prime reason for stock interdependence with developed markets.
Overall, we can say that the results of DY model have magnifying
effect on the understanding of spillover during GFC and post-crisis
period. The magnitude of spillover further adds value of our analysis.
Overall, the results seem to agree with Aloui et al. (2011), Baur (2012),
Kenourgios et al. (2013), Kenourgios and Dimitriou (2015) and
Syriopoulos et al. (2015).
To have a better grip on static spillover analysis, we plot the time-
varying spillover indices along with net return spillovers from one
sectoral index to all others. Fig. 1 shows the plot of total return spillover
index. We have considered 100-week rolling window. The plot exhibits
that during 2006 to 2008; the spillover indices of all sectors show an
upward trend. The plot displays a sudden decline in the spillover index
of all sectoral indices with varying magnitudes during US financial
crisis and Eurozone upheavals. This is in accordance with the findings
of Syriopoulos et al. (2015) who state that the BRICS industrial and
financial sector indices were severely affected by the 2008 global fi-
nancial crisis. Since 2009, the index has had a sudden rise; it reached its
peak in the mid-2011, which can be marked as post-crisis period and
then the spillover indices gradually come down to the 2007 level.
However, post-2012 period shows a secular decline in all spillover in-
dices until mid-2015, and then it shows an upward trend. We have
plotted the time-varying net spillover of sample variables.
Overall, it appears that the dynamic dependence structure captures
the major turning points during the study period. For example, the
event of GFC and oil slowdown in clearly visible. More importantly, the
high variations in commodities prices in 2008 are also well explained
by the results of DY model.
Fig. 3a–f show the net return spillover moving from one variable to
another. It is mainly plotted to analyze the net spillover variations over
time. To begin with, the aerospace sector, it appears that during the
sample period of this study and considering the 100-week rolling
window: Europe, USA, and World are the net transmitters of shocks to
BRIC indices, which are a net receiver of shocks. However, in the case of
the banking sector, the plot shows a different pattern. The USA appears
to be the net receiver of shock throughout the sample period with little
upward variations, whereas Brazil seems to be the net transmitter of
shock during the crisis period of 2008 and it remains in the positive
zone until 2013. The possible explanation could be because of the
sudden shoot-up in commodities prices in 2008 and higher inflow of
capital in emerging markets including Brazil. The strong trade linkage
between China and Brazil could possibly be another formiding factor of
high rise of Brazil. In 2013, the trade between China and Brazil reached
to $83billion. The high growth in Chinese acquitions and heavy in-
vestment from Central State-Owned Enterprises are another major
reason for the rise of Brazil (see CBBC, 2011).9
In the same way, under the time-varying framework, we find that
the net spillover results indicate that among sample sectors, some
sample sectoral indices exhibit different spillover patterns than static
spillover results shown in Tables 2 & 3. In the case of the banking
8
Delcoure and Singh (2016) state that although BRIC countries share
common broad worldviews supporting a greater representation of the devel-
oping world in the international community, they have fundamental differ-
ences, geopolitical rivalries, and competition that deeply undermine their co-
operation and partnership.
9 11
For details, please visit: https://www.wsj.com/articles/how-brazils-china-
driven-commodities-boom-went-bust-1440728049 and https://www.ft.com/
content/1d803686-c48e-11e7-b2bb-322b2cb39656 (accessed on 06 June
2018).
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International Review of Financial Analysis 59 (2018) 117–133
sector, Brazil appears to be the net transmitter of shocks during the
crisis period. In the case of industrial metal & mining sector, Russia is
leading transmitter of shocks to all other indices. In the case of the
electricity sector, China exhibits high return spillover followed by
Russia and Brazil. In the case of industrial transportation and oil & gas
sectors, Brazil is the net transmitter of a shock to other countries in
BRIC during 2009–2011 and mid-2013.
Overall, we can say that Brazil and Russia exhibit better cross-
country spillover than India and China. The results of China confirm the
findings of Kocaarslan, Sari, Gormus, and Soytas (2017) who explain
that the large size of foreign exchange reserves and limited access of
financial market for foreign investors are the prime reason for limited
dependence between China and other BRIC partners and also with the
developed markets.
5.2. Volatility spillover
In this study, we use the absolute value of returns to predict vola-
tility. Forsberg and Ghysels (2007) in their study report that absolute
returns predict volatility quite well.10 Tables A1 & A2 report similar
outcomes as shown in Tables 2 & 3.11 The magnitude of total volatility
spillover ranges between 41.40% (aerospace sector) to 68% (industrial
metal & mining sector). Similar to return spillover; we find that among
BRIC, Brazil exhibits higher magnitude of volatility spillover compared
to Russia, India, and China. The direction of all the volatility spillovers
is in agreement with return spillover results discussed above. Fig. 2
illustrates results of volatility spillover index. Fig. 4a–f show the net
volatility spillover moving from one variable to another. For the sake of
brevity, we do not discuss the detailed results here.
Overall, we find that US sectoral indices exhibit higher magnitude of
both return and volatility spillovers with Brazil, India and Russia sec-
toral indices rather than sectoral indices of China. The result is in line
with findings of Syriopoulos et al. (2015).12 Morales and Gassie-Falzone
(2011) state that the integration of the Chinese financial system and
energy markets with the US stock market is seen to be still limited. On
the other hand, the Brazilian, Indian and Russian markets are com-
paratively more sensitive to US market shocks and oil market in-
stability.
5.3. Net pairwise spillover networks
We now take a different perspective and examine the strength of
return spillover moving from one sample country to another. For this
purpose, we follow the procedure of connectedness proposed by
Diebold and Yilmaz (2014 & 2016). We calculate the net pairwise
spillovers for each sector with 21 pairs. Fig. 5a–f exhibit the networks of
net pairwise directional return spillovers for sample sectors. Following
Fernández-Rodríguez, Gómez-Puig, and Sosvilla-Rivero (2015), the
width of the arrow represents the intensity of return spillovers, and the
diameter of the node shows market capitalization of each sectoral index
of sample countries which in a way reflects the size of the market. In the
cases of aerospace and banking sectors, we find that Brazil is the net
pairwise transmitter of shocks (thick edge) to Russia, India, and China.
India is the net transmitter of return spillover shocks to Russia. For
electricity and industrial transportation sectors, it appears that within
BRIC, Brazil triggers the shocks to India, China, and Russia in the case
of electricity sector while for the transport sector, Brazil emerged as the
emitter of net pairwise return spillover to other BRIC countries. In cases
of industrial, metal and mining and oil & gas sectors, Brazil is the net
10
For further details, please refer Zhang and Wang (2014)
The online appendix shows the volatility spillover results estimated using
DY method (see Tables A1 & A2).
12
Bhar and Nikolova (2009) state that Chinese financial system is of rela-
tively closed nature.
W. Ahmad et al. International Review of Financial Analysis 59 (2018) 117–133

Fig. 1. Total return spillover indices among sample countries in different sectors using 10-step-ahead FEVD (forecast error variance decomposition), 100 weeks
rolling window.

Fig. 2. Total volatility spillover indices among sample countries in different sectors using 10-step-ahead FEVD, 100 weeks rolling window.

transmitter of shocks within BRIC. Among global indices, the World is
the net transmitter to return spillover shocks to Europe. However,
magnitudes are relatively lower for BRIC's banking sector indices. The
strong spillover effect of Brazil could be because of the high economic
proximity of Brazil with Russia, India and China. With China, Brazil
enjoys strong economic tie-up and it received huge some of investment.
Any change in economic outlook of Brazil may have negative impact on
other BRIC countries. According to CBBC (2011), China invested about
45% of its total investment in energy (oil and gas) followed by mining
(20%), steel (10%) and electricity (3%). Similarly, the strong spillover
between India and Brazil at sectoral level could be due to high bilateral
trade which has seen the growth of more than 35% in 2016–2017. On
investment side, both countries have mutual investments across major
sectors including automobiles, energy, mining and other applied pro-
ducts.13 Similarly, between Brazil and Russia, it is the mutually
13
See: https://www.mea.gov.in/Portal/ForeignRelation/India_Brazil_bief.
pdf (accessed on 05 June 2018).

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Fig. 3. a–f shows the net return spillover between an individual country and other sample countries in the Aerospace, banking, industrial metal & mining, industrial
transportation, oil & gas and electricity sectors using 10-step-ahead FEVD, 100 weeks rolling window.

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Fig. 3. (continued)

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Fig. 4. a–f shows the net volatility spillover between an individual country and other sample countries in the Aerospace, banking, industrial metal & mining,
industrial transportation, oil & gas and electricity sectors using 10-step-ahead FEVD, 100 weeks rolling window.

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Fig. 4. (continued)

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Fig. 5. a–f shows the time-varying net

pairwise directional return spillovers
for the sample sectors covering full
sample period. Notes: The above net-
work plot exhibits robust and visible
directional return spillovers between
the 21 pairs of the sample sectoral in-
dices. Node size in different colors in-
dicates market capitalization of re-
spective sectoral sample indices.
Thickness of black edges (thick to thin,
in descending order), correspond, re-
spectively to cases where we find a
strong net pairwise directional con-
nection. Edge represents the average
a) Aerospace b) Banking value of pairwise spillover over the
sample period. (For interpretation of
the references to color in this figure
legend, the reader is referred to the
web version of this article.)

c) Electricity d) Industrial Transportation

e) Industrial Metal and Mining f) Oil & Gas

benefiting economic relationship. According to Koval and Petersburg
(2011), Brazil had the surplus export to Russia in 2007 with the trade
size of USD 4.7 billion which reached to USD 6.7 billion in 2008. The
areas of mutual trade include metal, machinery and equipment and
high tech exports from Russia.
5.4. Dynamic conditional correlation analysis
To substantiate the findings of DY method, we apply the dynamic
conditional correlation technique given by Engle (2002).14 Figs. A1–A6
show the dynamic conditional correlations between sample countries in
each sector. The plot of correlations of returns over the sample period
14
The online appendix [Tables A3 & A4] exhibit the estimated results of DCC
model.
exhibits that the dynamic conditional correlations show some fluctua-
tions. Considering the case of BRIC sectoral indices, it is clear that Brazil
exhibits high dynamic correlations with USA, World, and Europe.
Within BRIC, we find strong interdependence of Brazil with India and
Russia. China shows limited dependence with Brazil and Russia. How-
ever, India exhibits low correlation with Russia and China. The mag-
nitude of correlation varies between −0.25 to 0.75%. In all the cor-
relation series, we see a jump in correlation during crisis period
2008–2009, indicating a strong case of contagion phenomenon. All
sectoral indices of BRIC exhibit high comovement with World and
Europe. However, the case of USA seems to be relatively different, as its
sectoral indices do not appear to co-move well with BRIC indices.
However, the diagnostic results of DCC model based on Q-statistics
indicate that the model is the best fit for dynamic correlation analysis.
Finally, considering the break-up of events related to the global

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Table 4 Table 5
Hedge ratio long/short summary statistics. Hedge ratio long/short summary statistics.
Mean SD Min. Max. Mean SD Min. Max. Industrial transportation Oil & gas sector

Aerospace sector Banking sector Mean SD Min. Max. Mean SD Min. Max.

CHN/BRZ 0.10 0.21 −0.72 1.04 0.22 0.08 0.02 0.57 CHN/BRZ 0.14 0.06 0.03 0.4 0.18 0.08 −0.03 0.5
IND/BRZ 0.16 0.15 −0.40 0.69 0.44 0.12 0.17 0.79 IND/BRZ 0.28 0.13 0.09 1.67 0.29 0.11 0.03 0.69
RUS/BRZ 0.02 0.20 −0.91 0.85 0.56 0.16 0.24 1.33 RUS/BRZ 0.18 0.08 0.04 0.52 0.47 0.13 0.11 1.08
IND/CHN 0.12 0.12 −0.29 0.64 0.28 0.14 −0.01 0.77 IND/CHN 0.16 0.12 −0.01 1.14 0.26 0.15 −0.04 0.95
RUS/CHN −0.10 0.17 −0.87 0.46 0.35 0.18 −0.21 1.21 RUS/CHN 0.18 0.13 −0.46 1.44 0.25 0.16 −0.26 0.9
RUS/IND 0.01 0.19 −0.79 0.84 0.39 0.12 0.02 0.78 RUS/IND 0.16 0.1 −0.24 0.56 0.48 0.16 0.02 1.05
USA/BRZ 0.23 0.12 0.02 0.72 0.32 0.23 0.08 1.38 USA/BRZ 0.66 0.18 0.29 1.27 0.33 0.11 0.06 0.71
USA/CHN 0.03 0.07 −0.22 0.42 0.21 0.19 0.00 1.28 USA/CHN 0.4 0.17 0.06 0.91 0.21 0.15 −0.08 1.07
USA/IND 0.13 0.11 −0.07 0.94 0.26 0.19 0.03 1.11 USA/IND 0.37 0.13 0.04 0.87 0.26 0.12 0 0.69
USA/RUS −0.01 0.04 −0.16 0.23 0.28 0.18 0.06 1.22 USA/RUS 0.13 0.05 0.01 0.37 0.38 0.12 0.17 0.94
WORLD/BRZ 0.24 0.12 0.05 0.74 0.37 0.16 0.12 1.09 WORLD/BRZ 0.24 0.1 0.08 0.77 0.39 0.11 0.1 0.67
WORLD/CHN 0.03 0.07 −0.22 0.45 0.26 0.16 0.05 1.07 WORLD/CHN 0.17 0.09 0.03 0.61 0.25 0.15 −0.08 0.97
WORLD/IND 0.14 0.12 −0.05 1.05 0.30 0.15 0.07 0.93 WORLD/IND 0.19 0.09 0.03 0.6 0.36 0.14 0.04 0.77
WOLRD/RUS −0.01 0.04 −0.20 0.22 0.32 0.13 0.12 0.91 WOLRD/RUS 0.06 0.04 0 0.25 0.49 0.11 0.25 0.91
WORLD/USA 0.90 0.09 0.68 1.22 0.66 0.15 0.28 1.44 WORLD/USA 0.24 0.09 0.07 0.55 0.94 0.1 0.68 1.33
EUR/CHN 0.03 0.08 −0.21 0.39 0.28 0.18 0.03 0.98 EUR/CHN 0.15 0.08 0.01 0.44 0.24 0.15 −0.09 0.92
EUR/BRZ 0.22 0.11 −0.03 0.62 0.43 0.19 0.14 1.22 EUR/BRZ 0.24 0.1 0.08 0.63 0.38 0.1 0.1 0.71
EUR/IND 0.15 0.12 −0.15 0.89 0.34 0.16 0.05 0.93 EUR/IND 0.19 0.08 0.02 0.52 0.37 0.15 0.03 0.81
EUR/RUS −0.02 0.04 −0.26 0.14 0.39 0.15 0.15 0.89 EUR/RUS 0.06 0.04 0 0.25 0.57 0.11 0.3 0.91
EUR/USA 0.68 0.18 0.21 1.34 0.72 0.17 0.26 1.41 EUR/USA 0.26 0.09 0.08 0.51 0.88 0.16 0.56 1.44
EUR/WORLD 1.03 0.17 0.54 1.41 1.23 0.18 0.78 1.72 EUR/WORLD 1.03 0.16 0.59 1.6 1.03 0.09 0.82 1.37

Electricity sector Industrial metal & mining

CHN/BRZ 0.16 0.09 −0.08 0.48 0.26 0.10 0.02 0.63
Note: Table illustrates hedge ratios. BRZ (Brazil), RUS (Russia), IND (India),
IND/BRZ 0.38 0.13 0.11 1.11 0.51 0.15 0.20 1.28 CHN (China), USA (United States), EUR (Europe), WORLD(World).
RUS/BRZ 0.49 0.22 0.19 1.59 0.47 0.14 0.14 0.96
IND/CHN 0.21 0.12 0.02 0.80 0.30 0.12 0.03 0.82 as, for example, IND/BRZ (0.16) indicates that a $1 long position in IND
RUS/CHN 0.18 0.14 −0.40 1.11 0.24 0.12 −0.04 0.71 hedged for 16 cents with a short position in BRZ. To aerospace sector,
RUS/IND 0.50 0.25 0.03 2.00 0.44 0.12 0.13 0.88
USA/BRZ 0.20 0.09 0.05 0.70 0.58 0.15 0.30 1.08
the cheapest hedging asset is long RUS, and short IND (0.01) and the
USA/CHN 0.07 0.05 −0.07 0.39 0.32 0.13 0.04 0.98 most expensive hedging strategy is long IND and short BRZ. In the si-
USA/IND 0.15 0.07 0.02 0.56 0.46 0.15 0.14 1.02 milar vein, we can also interpret the hedge ratios of other sectoral in-
USA/RUS 0.10 0.05 0.00 0.31 0.48 0.12 0.19 1.03 dices of sample countries and regions. For the sake of brevity, we will
WORLD/BRZ 0.27 0.09 0.10 0.68 0.54 0.12 0.27 0.86
highlight the lowest and highest hedge ratios in each sector within BRIC
WORLD/CHN 0.11 0.06 −0.01 0.49 0.30 0.11 0.08 0.84
WORLD/IND 0.24 0.09 0.05 0.67 0.50 0.13 0.19 0.94 and combine BRIC with global indices. For banking sector, the cheapest
WOLRD/RUS 0.17 0.06 0.03 0.45 0.48 0.10 0.21 0.83 hedge is CHN/BRZ, and the most expensive hedge is RUS/BRZ. The
WORLD/USA 0.74 0.12 0.42 1.09 0.73 0.07 0.52 0.96 overall picture is different, after combining BRIC with global factors, it
EUR/CHN 0.12 0.08 −0.01 0.63 0.29 0.13 0.05 0.81 appears that the most expensive hedge is EUR/WORLD (1.23) followed
EUR/BRZ 0.30 0.11 0.10 0.66 0.54 0.14 0.23 1.03
EUR/IND 0.28 0.11 0.03 0.63 0.49 0.15 0.13 1.01
by EUR/USA (0.72) and WORLD/USA (0.66). Among the cheapest
EUR/RUS 0.24 0.08 0.04 0.52 0.61 0.13 0.28 1.05 hedge is USA/CHN (0.21) followed by CHN/BRZ (0.22). It is in
EUR/USA 0.69 0.17 0.27 1.22 0.71 0.11 0.39 1.00 agreement with the finding of Lai and Tseng (2010) who report that the
EUR/WORLD 1.26 0.15 0.84 1.83 1.03 0.10 0.70 1.33 Chinese stock market can act as a safe haven for portfolio diversifica-
tion during crisis period. In the case of the electricity sector, we find
Note: Table illustrates hedge ratios. BRZ (Brazil), RUS (Russia), IND (India),
that within BRIC, the cheapest hedge is CHN/BRZ (0.16) followed by
CHN (China), USA (United States), EUR (Europe), WORLD (World).
RUS/CHN (0.18), while the most expensive hedge is RUS/IND (0.50)
followed by RUS/BRZ (0.49). To BRIC with global factors, the cheapest
financial crisis, the findings of DCC model are consistent with DY
hedge is USA/CHN (0.07) followed by USA/RUS (0.10), while the most
methodology.
expensive hedge is EUR/WORLD (1.26) followed by WORLD/USA
(0.74). For industrial metal & mining sector, within the BRIC scenario is
5.5. Hedging for RUS/CHN (0.24) followed by CHN/BRZ (0.26), while the most ex-
pensive hedge is IND/BRZ (0.51) followed by RUS/BRZ (0.47). The
Following Kroner and Sultan (1993), we compute time-varying hedge ratios at aggregate level exhibit similar cheapest and costliest as
hedge ratios from the DCC model.15 Tables 4–5 show the hedge ratio of reported in the case of the electricity sector. For the industrial trans-
sample pairs. Considering BRIC, World, Europe and USA, we formulate portation sector, CHN/BRZ (0.14) is the cheapest hedge followed by
21 pairs in each sector.16 For the aerospace sector, within BRIC mar- IND/CHN (0.16) and RUS/IND (0.16). The most expensive hedge is
kets, the average values of hedge ratios are high in cases of IND/BRZ IND/BRZ (0.28) within BRIC. At the aggregate level, we find that the
(0.16), IND/CHN (0.12) and CHN/BRZ (0.10). The lowest values are in combinations of EUR/WORLD (1.03) and WORLD/RUS (0.06) and
cases of RUS/IND (0.01) and RUS/BRZ (0.02). However, hedge ratio of EUR/RUS (0.06) are the costliest and cheapest hedge, respectively.
RUS/CHN shows negative value (−0.10). We can interpret these values Lastly, oil & gas sector indices exhibit that within BRIC, the lowest cost
hedge is CHN/BRZ (0.18) and the costliest hedge is RUS/IND (0.48).
Overall, we find EUR/WORLD (1.03) as the most expensive one. The
15
For the sake of brevity, we have not shown the graphs of time-varying cheapest hedge is CHN/BRZ (0.18) followed by USA/CHN (0.21).
hedge ratios. However, it is available upon request. For further details on
hedging and portfolio weights, please see the online appendix.
16
We employ the following notation for sectoral indices: BRZ (Brazil), RUS 5.6. Portfolio weights
(Russia), IND (India), CHN (China), USA (United States), EUR (Europe),
WORLD (World). Following Kroner and Ng (1998), we calculate the time-varying

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W. Ahmad et al. International Review of Financial Analysis 59 (2018) 117–133

Table 6 Table 7
Portfolio weights summary statistics. Portfolio weights summary statistics.
Mean SD Min. Max. Mean SD Min. Max. Industrial transportation Oil & Gas sector

Aerospace sector Banking sector Mean SD Min. Max. Mean SD Min. Max.

CHN/BRZ 0.35 0.11 0.00 0.79 0.67 0.17 0.12 1.00 CHN/BRZ 0.67 0.17 0.16 0.96 0.73 0.18 0.26 1
IND/BRZ 0.46 0.13 0.17 1.00 0.48 0.18 0.09 1.00 IND/BRZ 0.53 0.2 0 0.94 0.76 0.18 0.08 1
RUS/BRZ 0.25 0.10 0.08 0.72 0.42 0.18 0.00 0.95 RUS/BRZ 0.23 0.11 0 0.78 0.77 0.2 0 1
IND/CHN 0.38 0.12 0.05 0.74 0.67 0.17 0.14 0.97 IND/CHN 0.63 0.19 0.13 1 0.52 0.22 0.08 0.99
RUS/CHN 0.62 0.08 0.24 0.84 0.70 0.17 0.30 1.00 RUS/CHN 0.85 0.11 0.46 1 0.59 0.2 0.1 0.97
RUS/IND 0.72 0.10 0.41 0.95 0.54 0.18 0.09 0.90 RUS/IND 0.77 0.15 0.04 1 0.6 0.21 0.01 1
USA/BRZ 0.95 0.07 0.52 1.00 0.77 0.29 0.00 1.00 USA/BRZ 0.33 0.2 0 0.9 1 0.01 0.88 1
USA/CHN 0.12 0.11 0.00 0.67 0.40 0.28 0.00 1.00 USA/CHN 0.76 0.16 0.27 0.99 0.33 0.2 0 1
USA/IND 0.13 0.14 0.00 0.97 0.24 0.26 0.00 1.00 USA/IND 0.63 0.2 0 0.98 0.29 0.2 0 0.92
USA/RUS 0.10 0.09 0.00 0.61 0.19 0.25 0.00 1.00 USA/RUS 0.28 0.12 0 0.78 0.1 0.14 0 0.91
WORLD/BRZ 0.96 0.06 0.56 1.00 0.95 0.15 0.00 1.00 WORLD/BRZ 0.97 0.09 0.2 1 1 0 1 1
WORLD/CHN 0.11 0.11 0.00 0.71 0.29 0.25 0.00 1.00 WORLD/CHN 0.23 0.17 0 0.88 0.32 0.21 0 0.99
WORLD/IND 0.10 0.13 0.00 1.00 0.08 0.17 0.00 0.96 WORLD/IND 0.08 0.13 0 0.77 0.26 0.21 0 0.92
WOLRD/RUS 0.09 0.09 0.00 0.64 0.04 0.11 0.00 0.86 WOLRD/RUS 0.03 0.05 0 0.34 0.02 0.08 0 0.72
WORLD/USA 0.29 0.37 0.00 1.00 0.25 0.29 0.00 1.00 WORLD/USA 0 0.01 0 0.23 0.53 0.4 0 1
EUR/CHN 0.16 0.09 0.00 0.63 0.44 0.27 0.00 1.00 EUR/CHN 0.32 0.18 0.03 0.82 0.37 0.21 0 0.97
EUR/BRZ 0.83 0.11 0.38 1.00 0.80 0.26 0.00 1.00 EUR/BRZ 0.93 0.12 0.29 1 0.99 0.02 0.7 1
EUR/IND 0.19 0.12 0.00 0.94 0.22 0.23 0.00 0.96 EUR/IND 0.14 0.14 0 0.76 0.32 0.23 0 0.93
EUR/RUS 0.13 0.08 0.00 0.59 0.14 0.19 0.00 0.84 EUR/RUS 0.04 0.05 0 0.34 0.01 0.06 0 0.56
EUR/USA 0.69 0.20 0.00 1.00 0.60 0.29 0.00 1.00 EUR/USA 0.01 0.03 0 0.35 0.66 0.31 0 1
EUR/WORLD 0.87 0.25 0.00 1.00 0.95 0.19 0.00 1.00 EUR/WORLD 0.82 0.28 0 1 0.79 0.35 0 1

Electricity sector Industrial metal & mining

CHN/BRZ 0.57 0.19 0.10 0.93 0.64 0.18 0.15 0.99
Note: Table illustrates portfolio weights. BRZ (Brazil), RUS (Russia), IND
IND/BRZ 0.45 0.17 0.00 0.81 0.57 0.23 0.00 1.00 (India), CHN (China), USA (United States), EUR (Europe), WORLD (World).
RUS/BRZ 0.32 0.19 0.00 0.84 0.58 0.20 0.03 1.00
IND/CHN 0.60 0.20 0.07 0.99 0.58 0.19 0.11 0.99 6. Conclusion and discussion
RUS/CHN 0.68 0.20 0.13 1.00 0.57 0.18 0.15 0.96
RUS/IND 0.64 0.24 0.00 1.00 0.48 0.19 0.00 0.95
USA/BRZ 0.93 0.11 0.28 1.00 0.79 0.24 0.00 1.00
The analysis of directional interdependence via returns and volati-
USA/CHN 0.21 0.12 0.02 0.67 0.49 0.19 0.07 1.00 lity spillovers allows us to conclude the main findings in following way:
USA/IND 0.10 0.12 0.00 0.71 0.36 0.23 0.00 1.00 First, the results of directional spillover indicate that there is a sig-
USA/RUS 0.06 0.06 0.00 0.46 0.37 0.18 0.00 1.00 nificant amount of heterogeneity across sectoral indices of BRIC as far
WORLD/BRZ 0.98 0.06 0.56 1.00 0.99 0.05 0.44 1.00
as return and volatility spillovers are concerned. However, within BRIC,
WORLD/CHN 0.17 0.12 0.00 0.68 0.36 0.18 0.02 0.96
WORLD/IND 0.02 0.07 0.00 0.61 0.12 0.18 0.00 0.90 Brazil and Russia exhibit higher magnitude of return spillover com-
WOLRD/RUS 0.01 0.05 0.00 0.46 0.12 0.15 0.00 0.64 pared to China and India. Chinese sectoral indices show the least
WORLD/USA 0.39 0.28 0.00 1.00 0.06 0.13 0.00 0.87 amount of cross-country spillover across sample countries including
EUR/CHN 0.34 0.18 0.00 0.82 0.43 0.19 0.07 0.96 Europe and World. Russia shows relatively better return spillover me-
EUR/BRZ 0.82 0.17 0.25 1.00 0.88 0.19 0.00 1.00
EUR/IND 0.16 0.17 0.00 0.73 0.26 0.23 0.00 1.00
chanism than China and India. Indian sectoral indices exhibit greater
EUR/RUS 0.06 0.10 0.00 0.61 0.18 0.22 0.00 1.00 interdependence with Russia followed by Brazil. Second, USA appears
EUR/USA 0.76 0.17 0.13 1.00 0.33 0.25 0.00 1.00 to be the net transmitter of a shock to all sectoral indices of BRIC except
EUR/WORLD 0.99 0.05 0.38 1.00 0.83 0.29 0.00 1.00 banking and electricity sectors. It implies that the USA acts as one of the
important transmitters of sectoral returns in these markets. More spe-
Note: Table illustrates portfolio weights. BRZ (Brazil), RUS (Russia), IND
cifically, the results indicate that US sectoral indices exhibit a higher
(India), CHN (China), USA (United States), EUR (Europe), WORLD (World).
level of interdependence with Brazil and India than China and Russia.
USA's net return spillovers are particularly visible in the sectoral indices
portfolio weights.17 Tables 6–7 show the calculated portfolio weights.
of industrial metal & mining, oil & gas, industrial transportation,
The values across different sectoral indices indicate that in the case of
banking and to some extent in the case of the aerospace sector. Third,
aerospace sector, the average weight ranges between RUS/BRZ (0.25)
the FEVDs of world sectoral indices explain the spillover behavior of
and RUS/IND (0.72) within BRIC. The average weight for RUS/BRZ
BRIC's sectoral returns better than any other one. Among BRIC, the
(0.25) implies that in a $1 portfolio, we should invest 25 cents in RUS
magnitude of return spillover is highest in the case of Brazil followed by
and 75 cents in BRZ. The average weight for RUS/IND (0.72) indicates
Russia, India and then China. The extent of return spillover of China is
that out of $1 investment, we should invest 72 cents in RUS and 28
lowest and remains in single digit across all sectors even when we
cents in IND. Seemingly, overall sample results suggest that in the case
compare it with global indices. Comparing Europe with BRIC sectoral
of aerospace sector, the average weight ranges between WORLD/BRZ
indices, it appears that Europe's sectoral indices are the net transmitters
(0.96) followed by USA/BRZ (0.95) and EUR/WORLD (0.87). In the
of return spillover shocks to all BRIC sectoral indices, implying that
case of the banking sector, it appears that average portfolio weight
European sectoral indices act as one of the important drivers of in-
varies between WORLD/RUS (0.04) to WORLD/BRZ & EUR/WORLD
formational spillover. It also means that the risk arising from European
(0.95). Similarly, in the case of the electricity sector, the average weight
stock market may have a strong bearing on BRIC sectoral indices. Our
ranges between WORLD/RUS (0.01) to EUR/WORLD (0.99). Industrial
results are in line with Zhang, Li, and Yu (2013), they report an upward
metal & mining sector exhibits average portfolio weights ranging be-
correlation between European stock markets and BRICS. These results
tween WORLD/USA (0.06) to EUR/BRZ (0.88).
are also in agreement with the study of Ahmad et al. (2013) which
reports the contagion effect of Eurozone debt crisis on BRIICKS stock
markets. It is one of the significant findings of this study.
Fourth, under the time-varying framework, some sample sectoral
17 indices exhibit different net spillover patterns than static spillover
Online appendix provides the details about Kroner and Ng (1998).

131
W. Ahmad et al.
results. In the case of the banking sector, Brazil appears to be the net
transmitter of shocks during the crisis period. In the case of industrial
metal and mining sector, Russia is the leading transmitter of shocks to
all other indices. In the case of the electricity sector, China exhibits high
return spillover followed by Russia and Brazil. In the case of industrial
transportation and oil & gas sectors, Brazil appears as the net trans-
mitter of a shock to other countries in BRIC during 2009–2011 and mid-
2013. Overall, we can say that Brazil and Russia exhibit better cross-
country spillover than India and China. Fifth, the findings of return
spillovers are further supported by volatility spillover results. The re-
sults of volatility spillover also indicate that Europe, World, and the
USA are critical to the financial performance of BRIC sectoral indices as
the results suggest that the shocks arising from World, Europe and USA
have a significant impact on the movements of BRIC's stock markets. It
also suggests that there is a strong case of financial contagion between
global indices and BRIC markets. These findings further provide an
important direction to trace the channels of risk spillover moving from
these global and regional indices to BRIC economies during US financial
crisis and Eurozone upheavals. Sixth, the results of directional spillover
are substantiated by the dynamic conditional correlations results. The
results indicate that within BRIC, we find high interdependence of
Brazil with India and Russia. China shows limited dependence on Brazil
and Russia. However, India exhibits low correlation with Russia and
China. In all the correlation series, we see a jump in correlation during
crisis period 2008–2009, indicating a strong case of contagion phe-
nomenon.
Seventh, the results of time-varying hedge ratios and portfolio
weights suggest that the most attractive hedge combinations are the
ones, which exhibit limited return and volatility spillovers. For ex-
ample, China appears to be the cheapest hedge when we pair it with
Brazil, Russia, and India. While Brazil and Russia are not the most in-
expensive hedges for investors, they exhibit high directional returns
and volatility spillovers. From investors' perspective, we find that
Chinese sectoral indices are one of the most attractive assets for hedging
when it is combined with Brazil, Russia, India and global indices mainly
the USA. Global indices provide limited hedging opportunity as values
of hedge ratios appear to be higher than the rest. Eighth, the average
values of time-varying portfolio results indicate that the sectors, which
exhibit high time-varying correlations, have lower average portfolio
weights compared to indices with low dynamic correlations. BRIC's
sectoral indices can provide profitable portfolio diversification oppor-
tunities. Notably, the Chinese sectoral indices provide better diversifi-
cation opportunities when they are combined with Russia, Brazil, and
India. One of the major findings of this study is that BRIC sectoral in-
dices appear to provide a better portfolio diversification opportunity
when they paired with the World and European sectoral indices. Ninth,
the estimated results of DY method are robust to several specifications.
Tenth, the time-varying net spillover plots capture significant turning
points in each sectoral index including global financial crisis and recent
energy market slowdown.
Overall, the findings of this study suggest that high return and vo-
latility spillovers are moving from major global indices to those of BRIC
across all our sectoral indices. It indicates the level of information
transmission between emerging and global markets are quite high.
However, within emerging markets, the spillover mechanism suggests
that BRIC is a heterogeneous asset class as China and India exhibit a
relatively lower level of inter-country spillover than Brazil and Russia.
China shows limited spillover with almost all the indices including
World and Europe, indicating that Chinese indices can be used for
portfolio allocation. The hedge ratio and portfolio results exhibit similar
outcomes. We find that global and regional indices can be paired with
BRIC markets for better hedging and portfolio diversification opportu-
nities. The findings of this study are in agreement with Bhar and
Nikolova (2009), Aloui et al. (2011), Morales and Gassie-Falzone
(2011), Baur (2012), Kenourgios et al. (2013), Kenourgios and
Dimitriou (2015) and Syriopoulos et al. (2015). These studies also draw
132
International Review of Financial Analysis 59 (2018) 117–133
a similar inference in the case of emerging markets. The outcomes of
this study are expected to provide important direction for policy re-
searchers and investors.
Appendix A. Supplementary data
Supplementary data to this article can be found online at https://
doi.org/10.1016/j.irfa.2018.07.005.
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