BRICS Capital Markets Co-Movement Analysis and Forecasting

Abstract

The present study analyses BRICS (Brazil, Russia, India, China, South Africa) capital markets in both time and frequency domain using wavelets. We used artificial neural network techniques to forecast the co-movement among BRICS capital markets. Wavelet coherence and clustering estimates uncover the interesting dynamics among the BRICS capital markets co-movement. A wavelet coherence diagram shows a clear contagion effect among BRICS nations, and it favors short period investments over longer period investments. Overall study estimates indicate that co-movement among BRICS nations significantly differs statistically at different levels. Except for China during the great financial crisis period, significant levels of co-movement were observed between other BRICS nations and that lasted for a longer period of time. A wavelet clustering diagram demonstrates that investors would not get any substantial benefits of diversification by investing only in the ‘Russia and China’ or ‘India and South Africa’ capital markets. Lastly, the study attempts to forecast the BRICS capital market co-movement using two different types of neural networks. Further, RMSE (Root Mean Square Error) values confirm the correctness of the forecasting model. The present study answers the key question, “What kind of integration and globalization framework do we need for sustainable development?”.

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