A momentum threshold model of stock prices and country risk ratings: Evidence from BRICS countries

•We examine asymmetric adjustments between BRICS stock markets and their country risk ratings.•Long-run cointegrating relationships exist between BRICS stock markets and their country risk ratings.•We find asymmetry in the long-run cointegrating relationship for each country.•There exist different profit opportunities to investors following positive and negative shocks.

We develop a multivariate momentum threshold autoregression (MTAR) model that examines the relationship between stock markets for each of the five BRICS countries – Brazil, Russia, India, China and South Africa – and changes in their economic, financial and political country risk ratings in response to positive and negative shocks. The findings suggest that the long-run and short-run relationships between the stock market and the three risk ratings variables of each country respond asymmetrically to shocks for all of the five BRICS, but at different speeds and depending on the direction of the shock, underpinning the differences in profit opportunities among these countries. The adjustment is faster for the individual BRICS following a positive shock (than a negative shock), except for Russia. Despite their grouping, the stock markets of the five BRICS countries are dissimilar and can add to diversification benefits in portfolios.