Academic journal article International Journal of Business

Dynamic Linkages among the Stock Exchanges of the Emerging Tigers of the Twenty First Century

Academic journal article International Journal of Business

Dynamic Linkages among the Stock Exchanges of the Emerging Tigers of the Twenty First Century

Article excerpt

ABSTRACT

This paper analyzes the dynamic interrelationships among the stock exchanges of the United States and of the four Emerging Tigers of the Twenty First Century, namely Brazil, China, India, and Russia. Using Vector Auto-Regression Models and daily data that span from May 1995 until October 2005, the dynamic linkages among these markets are studied.

JEL Classification: F0, F3, G0, C3, C5, E4, P0

Keywords: Stock Market Linkages; S&P 500; Brazil, China, India, Russia; North-South and East-West relationships; Vector Auto-Regression Models; Correlograms; Impulse Responses, Variance Decompositions.

I. INTRODUCTION

This paper investigates the dynamic linkages among the stock exchange rates of return for the following countries: Brazil, China, India and Russia (BRICs). The daily data spans from May 1995 until the end of 2004 with 2,641 observations for each stock market. Vector Auto Regression (VAR) models are used to study the dynamic interrelations among these rates of return in stock exchanges. These markets are becoming increasingly more important as the progression of globalization accelerates. These economies are rapidly growing relative to one another. Therefore, it is essential to study their economies to gain a better understanding of the world economy. The countries studied are reshaping world trade, world finances, global manufacturing, as well as North-South and East-West relationships. As these countries open themselves to the world, they are merging their relatively low costs and manpower reserves with the financial and technological strengths of the wealthier countries of the United States, Western Europe, and Japan. Unlike other nations, the BRICs have the scale and trajectory to challenge today's major developed economies in terms of their impact on the world economy and the evolution of globalization. (1)

Table 1 presents some economic data, population figures, and government structures for the countries in this study. Specifically, the table reports the Gross Domestic Product (GDP) in purchasing power parity dollars for the year 2004 in trillions, the GDP per capita, the estimated population in 2005, the government type, the gross fixed investment as percentage of GDP, the inflation rates, the unemployment rate in 2004, the public debt as a percentage of GDP, the amount of exports and imports in 2004, the amount of foreign reserves of foreign exchanges and gold in billion dollars, the amount of external debt and the currency used in each country in the study. Note that the unemployment rate in China and Russia are conservative estimates since both have substantial unemployment and underemployment in rural areas.

Klein (2004) terms the economies of China, India and Russia as The New Growth Centers. However, he recognizes that Brazil certainly could qualify for that distinction in the near future. According to Goldman Sachs's projections (O'Neill, 2005), if things go right, in less than 40 years from today, the BRICs economies together could be larger than those of the U.S., Japan, and the four largest European economies of Germany, France, Italy and the United kingdom (G6) in US dollar terms. By 2025, the BRICs could account for over half the size of the G6. Of the current G6, only the US and Japan may be among the six largest economies in US dollar terms in 2050. Consequently, the list of the world's ten largest economies may look quite different in 2050. The largest economies in the world (by GDP) may no longer be the richest (by income per capita), thus making strategic choices for firms more complex. (2)

While the BRICs economies are generally progressing, considerable policy improvement is needed in each country. The capacity of the BRICs to influence global dynamics relies on their ability to establish and sustain a growth-supportive policy environment. A number of BRICs investment funds have been established since 2003 and others are in the process of being launched. …

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