QUANTITATIVE RESEARCH METHOD

Quantitative Research Method

[Institute Name] Abstract

This paper examines the emerging market indices of Brazil, Russia, India, China, and Argentina (BRICA) and investigates the linkages among the stock markets of the BRICA countries and their relations with the US market. We employ the vector auto regression (VAR) techniques to model the interdependencies and Granger causality test to find evidence of a short-run relationship between these markets. In addition, we employ the Impulse Response test to evaluate the persistence of shocks by using daily data from 1st January, 2002 to 18th February, 2009. Our findings show that the US market has a significant effect on all BRICA countries in the same trading day. The most integrated markets to the BRICA countries are Russia and Brazil; the least integrated ones are China and Argentina. The Granger causality test supports our VAR calculations and shows that Russia influences all other countries and Brazil affects Argentina, Russia and India. However, China only affects Argentina and Russia. Impulse response test shows that all countries respond to an anticipated shock immediately and recover in nearly five or six days.

Table of Content

Introduction3

Literature Review4

Data and methodology6

Results9

Conclusion11

References13

Appendix15

Quantitative method

Introduction

Recent financial meltdown although appearing ruinously from the current viewpoint is by no means a unique event. Extraordinary events such as the US stock market crash in 1987; the breakdown of the European Monetary System in 1992; the turmoil in bond market in 1994 and the Asia- Pacific crisis beginning in 1997 were all extraordinary events. In today's fast moving finance world, there are many factors binding financial markets to each other. The existence of strong economic and trading links, the increases in liberalization activities of governments, the advancement of international trade and finance, rapid developments in telecommunication and trading systems, and the formation of common trading blocs such as NAFTA, EU and ASEAN are some factors contributing to financial integra- tion. However, integration among world equity markets reduces the diversification benefits of investing in international markets.

Therefore, it is vital for the international investors and global portfolio managers assess the dependencies among international stock markets especially whilst the economies in turmoil. In this paper we try to examine the relationship between the behaviour of stock prices of the BRICA countries and their interactions with US market to investigate whether there is potential for diversifying risk by investing in stock markets of these countries. BRICA, referring to the combination of Brazil, Russia, India, China and Argentina, consists of the fast-growing economies that are anticipated to surpass the current rich countries in the near future. However, there is no empirical research in the finance literature addressing to the interactions among the stock markets of BRICA countries. The major aim of this paper is to test whether the BRICA countries still offer international investors a valuable diversification benefit despite their rapidly growing economic integration and increasing role in the world economy. The paper is structured as follows: Section 2 briefly glances at the previous studies on market integration. In section 3 the data and the methodology ...