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International Portfolio Diversification Possibilities: Could BRICS become a Destination for G7 Invesments

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  • Lei Pan
  • Vinod Mishra

Abstract

We investigate the diversification possibilities between BRICS and G7 stock markets. Our theoretical model suggests that risk-averse investors are diversifying internationally. The findings of cointegration test with multiple structural breaks reveal that apart from China and India, the remaining BRICS equity markets can be a potential diversification destination over the long term. The full sample bootstrap Granger causality tests results imply that G7 stock markets have predictive power for most BRICS stock markets. Both the long-run and shortrun parametric stability tests suggest that the full sample parameters are unstable hence unreliable The bootstrap rolling window estimations outline the causalities between stock markets are increasing during the crisis periods and vary over different sub-samples. Overall, our causality findings suggest that the short-term diversification possibilities are extremely limited. Finally, we analyze the impact of different financial and macroeconomic determinants on the crosscountry stock market causality through a probit model. We find the difference in business conditions, excess return and size premium are the main drivers of the causality flows.

Suggested Citation

  • Lei Pan & Vinod Mishra, 2019. "International Portfolio Diversification Possibilities: Could BRICS become a Destination for G7 Invesments," Monash Economics Working Papers 11-18, Monash University, Department of Economics.
    • Handle: RePEc:mos:moswps:2018-11
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    References listed on IDEAS

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    More about this item

    Keywords

    international diversification; structural breaks; bootstrap rolling windows;
    All these keywords.

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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