Sectoral Dependence and Financial Contagion in the BRICS Grouping: An Application of the R-Vine Copulas
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Lumengo Bonga-Bonga
und
Johannes J. Hendriks
Abstract
This paper presents a novel approach utilising R-Vine copulas and tail dependence structures to distinguish between contagion and interdependence amid equity market interrelation. The approach is applied in the case of BRICS equity markets. Moreover, rather than analysing the equity markets in aggregate, our approach focuses on sectoral levels within BRICS equity markets to examine the nature of interrelation among them. Based on the tail dependence of sectoral equity market volatilities, empirical findings indicate minimal contagion events across various sectors of the BRICS equity markets. These results are corroborated through portfolio optimisation, demonstrating that markets identified as sources of contagion receive lower weights in the portfolio. This paper offers valuable insights for policymakers, investors, and asset managers by shedding light on the interrelationships among different sectors of the BRICS equity markets and the potential investment strategies that can be formulated based on co-movement types between these markets.
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Supplementary Material
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