Timescale-dependent stock market comovement: BRICs vs. developed markets

Abstract

This paper examines the differences in the asset return comovement of the BRIC countries (Brazil, Russia, India and China), the other developed economies in their regions (Canada, Hong Kong and Australia) and the major industrialized economies (the U.K., Germany and Japan) with respect to the U.S. for different return periods. The novelty of the paper is that the stock return indices are decomposed to several timescales using wavelet analysis and that the results are further used as inputs for the dynamic conditional correlation (DCC) framework, which is used as a measure of comovement. The results propose that the level of stock market comovement depends on regional aspects, the level of development and especially on the timescale of returns. These factors should be carefully considered in designing internationally diversified portfolios. The BRICs provide some portfolio diversification benefits, but it is not justifiable to treat all BRICs as a homogeneous group of emerging economies in terms of stock market comovement.