Risk Spillovers between BRICS Stock Markets, US Stock Market, Gold and Oil: A portfolio management approach

Abstract: This study investigates the correlation between the US stock market, oil prices, gold prices and the stock markets of five emerging markets: Brazil, Russia, India, China and South Africa (BRICS), in order to explore the risk spillovers and the financial contagion between the markets. A DCC-GJR-GARCH model is applied to daily data of returns from January 2000 to April 2020 and considers both a full sample analysis along with a three-pronged subsample analysis. Additionally, with the aim to explore international diversification possibilities by investing in these emerging economies, the optimal portfolio choice is analysed. Due to the positive correlations identified between the US and BRICS, risk spillovers between these financial markets are confirmed. In addition, financial contagion effects are detected within the crisis periods. Oil is found to be interdependent with BRICS, with a persistent financial contagion effect appearing in the financial crisis. Further, the result suggests marginal financial contagion between the gold market and BRICS, indicating that gold may be used as a safe-haven asset. The minimum-variance portfolio consists on average mainly of gold (27.1%), the US (27.0%) and China (13.9%), whereas Brazil (2.2%) and oil (2.7%) have the lowest weights in the portfolio. Moreover, the portfolio’s risk is compared to the risk of a portfolio excluding BRICS. The result implies an economically significant risk reduction, which particularly smoothens peaks and troughs of the portfolio's variance. On this ground, this study finds indications of diversification gains by including BRICS in a portfolio.