Causal interactions and financial contagion among the BRICS stock markets under rare events: a Liang causality analysis
Abstract
Purpose
The purpose of this paper is to investigate dynamics of causal interactions and financial risk contagion among BRICS stock markets under rare events.
Design/methodology/approach
Two methods are adopted: The new causal inference technique, namely, the Liang causality analysis based on information flow theory and the dynamic causal index (DCI) are used to measure the financial risk contagion.
Findings
The causal relationships among the BRICS stock markets estimated by the Liang causality analysis are significantly stronger in the mid-periods of rare events than in the pre- and post-periods. Moreover, different rare events have heterogeneous effects on the causal relationships. Notably, under rare events, there is almost no significant Liang's causality between the Chinese and other four stock markets, except for a few moments, indicating that the former can provide a relatively safe haven within the BRICS. According to the DCIs, the causal linkages have significantly increased during rare events, implying that their connectivity becomes stronger under extreme conditions.
Practical implications
The obtained results not only provide important implications for investors to reasonably allocate regional financial assets, but also yield some suggestions for policymakers and financial regulators in effective supervision, especially in extreme environments.
Originality/value
This paper uses the Liang causality analysis to construct the causal networks among BRICS stock indices and characterize their causal linkages. Furthermore, the DCI derived from the causal networks is applied to measure the financial risk contagion of the BRICS countries under three rare events.
Keywords
Acknowledgements
This work was supported by the Social Science Fund of Jiangsu Province [No. 20GLB008]; the National Natural Science Foundation of China [No. 71701104]; and the MOE Project of Humanities and Social Sciences [No. 17YJC790102]. The authors thanks to the suggestions by X. San Liang.
Citation
Lu, X., Sun, J., Wei, G. and Chang, C.-T. (2023), "Causal interactions and financial contagion among the BRICS stock markets under rare events: a Liang causality analysis", International Journal of Emerging Markets, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/IJOEM-01-2023-0055
Publisher
:Emerald Publishing Limited
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