Stock market volatility spillovers and portfolio hedging: BRICS and the financial crisis

- Global portfolio management strategies consider BRICS as a distinctive asset class and investment style.
- Dynamic BRICS-US equity market risk-return properties, correlations and volatility spillover effects are investigated.
- A VAR( - Significant return and volatility spillover dynamics between BRICS-US markets and business sectors are identified.
- Effective hedge ratios and optimal portfolio weights on BRICS-US stock market and business sector allocation are assessed.

The paper investigates the dynamic risk-return properties of the BRICS (Brazil, Russia, India, China, South Africa) capital markets and models potential time-varying correlations and volatility spillover effects with the US stock market. A VAR(1)-GARCH(1,1) framework contributes useful insight into US-BRICS market interactions and expands on a thin past empirical literature. A disaggregated approach pays attention to critical US-BRICS business sectors, namely the industrial and financial sectors. Significant return and volatility transmission dynamics are identified between the US and BRICS stock markets and business sectors. This is a critical input that can affect efficient global portfolio diversification and risk management strategies. Based on this empirical evidence, the study proceeds to assess effective portfolio hedge ratios and to construct optimal portfolio weights for diversified asset allocation to US-BRICS markets and business sectors.