International Review of Economics and Finance 46 (2016) 180–195

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International Review of Economics and Finance

journal homepage: www.elsevier.com/locate/iref

Information transmission and dynamics of stock price movements:

An empirical analysis of BRICS and US stock markets
cross
⁎
Rafiqul Bhuyana, , Mohammad G. Robbanib, Bakhtear Talukdarc, Ajeet Jainb
a
Department of Finance, College of Business and Economics, American University of Kuwait, Kuwait
b
Department of Accounting and Finance, College of Business and Public Affairs, Alabama A & M University, AL, USA
c
Department of Finance and Business Law, University of Wisconsin-Whitewater, WI, USA

A R T I C L E I N F O ABSTRACT

JEL Classification: This paper investigates the information transmission and spillover effects between the US stock
C10 market and the emerging stock markets of Brazil, Russia, India, China, and South Africa (BRICS)
C58 for the period 1999 to 2012. The paper uses a variant of the aggregate shock model under the
G11 GARCH framework and investigates the effects of both return and volatility spillover from the
G14
US market to the BRICS markets and among the BRICS markets. The chronological order of
G15
trading among the six markets (US and five BRICS markets) is utilized in analyzing the
Keywords: transmission of information between the US and BRICS equity markets. The results suggest that
Volatility
the US stock market has a significant mean return and volatility spillover effects on the BRICS
Spillover
stock markets. In addition, the Chinese stock market exerts a significant mean spillover effects
BRICS
Emerging markets on both the Indian and the US stock markets, and the mean spillover effects from the Indian
GARCH market to the Chinese market are equally strong. Further, overnight returns in the BRICS stock
markets are significantly influenced by their own latest daytime returns. The results contribute to
the extant spillover literature in demonstrating that the mean and volatility spillover effects exist
not only from the US market to the well-developed equity markets of Europe and East Asia as
shown in previous studies, but they also exist from the US market to the emerging equity
markets of BRICS economies.

1. Introduction

Information, whether it is company or industry specific or economic news, drives asset prices instantaneously as it arrives to the
market. As the era of cold war is over (almost!) and there are no longer communist and capitalist blocks among countries, increased
liberalization and global integration have started to reshape the world economy as a “one economy”. No single country is now
independent especially economically from the rest of the world. Now-a-days, information would instantly affect asset prices both
locally and globally. As a result of the continuously growing integration of international financial markets, it has become more
relevant and important to the study of the co-movements of asset prices in the international financial markets. Investors, who are
constantly seeking and competing for higher alpha, have also been searching for better investment opportunity both locally and
internationally. Among many high growth potential countries, Brazil, Russia, India, and China (formally known as BRIC), have been
known as the fastest growing countries and among the best emerging market choices for Wall Street and international investors from
around the world. As a result, BRIC countries have been enjoying capital inflows in their financial markets by international investors
who seek optimal portfolio allocation and international diversification. As the economic power house, United States has been the key

⁎
Corresponding author.
E-mail address: rafiqulbhuyan@gmail.com (R. Bhuyan).

http://dx.doi.org/10.1016/j.iref.2016.09.004
Received 20 June 2015; Received in revised form 16 September 2016; Accepted 19 September 2016
Available online 20 September 2016
1059-0560/ © 2016 Elsevier Inc. All rights reserved.
R. Bhuyan et al. International Review of Economics and Finance 46 (2016) 180–195

economic partner with most emerging countries including BRICs as a major importer and outsourcing business opportunities.
Recently, South Africa has joined the BRIC countries as the fifth fastest growing emerging country, formally known as BRICS, as it
has earned the membership due to its economic power, potential and prospect of offering economic partnership and mutual growth
among themselves and with the United States. Although literature exists on the dynamic return and volatility linkages among BRIC
countries and with USA and other developed countries, it is still absent to show such relationship among BRICS and with USA. None
the less, it is highly important to understand the information transmission and dynamic stock price movements among BRICS and
the USA for better investment allocation and international diversification. The main objective of this research is to fill in this gap in
the existing literature and bring insights of the magnitude of relationship among BRICS and between BRICS and the USA so that it is
useful for investors’ investment decision.
There is extant literature to study the relationship between markets, informational linkages and spillover effects, and other issues
of interest. A large body of literature focuses mostly on developed and major markets (Hamao, Masulis, & Ng, 1990; King &
Wadhwani, 1990; Jaffe & Westerfield, 1985a, 1985b; Eun & Shim, 1989; Barclay, Litzenberger, & Warner, 1990; Jiang,
Konstantinidib, & Skiadopoulosc, 2012, among others) and to a limited extent on few emerging markets. Academicians, in a very
limited number, also have recently looked at the dynamics of return and volatility transmissions among BRIC countries (Bhar and
Nikolova, 2009; Xu and Hamori, 2012, and others). Recently, South Africa has joined the BRIC countries forming the name as
BRICS. Interestingly, literature is absent, to the best of our knowledge, in understanding the dynamics of information transmission
among these BRICS countries, and between BRICS and the US financial market. As such it poses an interesting research question to
explore the return and volatility linkages among BRICS and with US.
We are especially interested in the extent of changes in the closing prices of stocks in the USA influence the price changes of the
BRICS markets in the short run. We are also interested in identifying the impact of overnight security price changes and open-to-
close price changes in one market on other markets among the BRICS countries in the short run. We conduct our research using
daily price data from 1999 to 2012 for these newly formed BRICS countries with US. We examine the transmission mechanisms of
the conditional first and second moments in index prices across these selected BRICS and US stock markets and allow for changing
conditional variances as well as conditional mean returns. To capture the chronological order of the opening times of the six markets,
we divide daily close-to-close returns into overnight returns (previous close-to-open) and daytime returns (open-to-close). This
enables us to analyze separately the spillover effect of price volatility of one market to the opening of another markets and on prices
of the after the opening of trading. Using a variant of the aggregate shock model under the GARCH framework, we study both the
mean return and volatility spillover effects from the US market to the BRICS markets and among the BRICS markets. Because BRICS
are from different continents, we follow the chronological order of trading among the six markets in analyzing the transmission of
information between the US and BRICS equity markets.
The study is timely and relevant as BRICS countries are growing faster than the rest of the world and can provide excellent
opportunities for investors to achieve a higher return on their investments along with the benefits of diversification. In addition, the
direction and quantum of information flow are also of paramount importance to execute the investment strategies.
The results in this paper suggest that the US stock market has a significant mean return and volatility spillover effects on the
BRICS stock markets. South Africa presents an interesting investment opportunity as it is positively influenced by the mean return of
US markets and much higher risk-return ratio compared to other BRICS countries. We observe that the Chinese stock market exerts
a significant mean spillover effects on the Indian stock market as well as on the US stock market, and the mean spillover effects from
the Indian market to the Chinese market are equally strong. Further, overnight returns in the BRICS stock markets are significantly
influenced by their own latest daytime returns.
The returns and volatility of US and BRICS equity markets, especially China, India, and South Africa, are related through trade
and investment as major trading partners. It is rather small between the US and Russia, and US and Brazil. Similarly, the US and
BRICS equity markets are also linked through changes in currency exchange rates. In addition, stock price movements are also
driven by herd mentality and as a result fads may be transmitted from the one market to the others and among markets. Similarly
the returns and volatility transmission among BRICS countries may be attributed to the level of economic activity between nations.
To better understand the information transmission mechanism between the US and BRICS equity markets and among BRICS
markets, it is important that we consider the chronological order of the opening and closing of the six equity markets. We also then
use appropriately specified daytime and overnight returns to capture the opening market time differentials of the six stock markets.
The chronological order of the opening of the six equity markets is: China, India, Russia, South Africa, Brazil and US. The US stock
market shares all but the first 30 minutes of its trading hours with the Brazilian stock market, and last one and half-hour trading
time of Russia and South Africa. US do not have any overlapping trading hours with China and India. The Chinese, Indian, Russian
and South African markets have some overlapping trading hours. The return and volatility may be transmitted in real time during
the overlapping hours between different countries due to advanced technology and world economic integration. This study uses
appropriately defined daily, overnight and daytime returns to capture the chronological ordering of the returns in studying the short-
term information transmission between the US and BRICS markets.
Our results contribute to the extant spillover literature in demonstrating that the mean and volatility spillover effects exist not
only from the US market to the well-developed equity markets of Europe and East Asia as shown in previous studies, but they also
exist from the US market to the emerging equity markets of BRICS economies. Our study also contributes to the finance literature on
the international transmission of information among the global financial markets as it is the first research that focuses on five high-
growth emerging equity markets, known as BRICS. Before South Africa has joined BRIC, it also has very little attention in the
empirical spillover literature. It is our belief that this research results would entertain further interest among researchers and
institutional investors to investigate these markets. The findings of our study can have significant implications to global portfolio

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allocation and diversification for investors in developed markets. The direction of information flow can help investors to plan the
investment strategies and achieve optimal international portfolio diversification.
The rest of the paper is organized as follows. Section 2 briefly reviews the prior researches related to volatility transmission,
especially among international stock markets. Section 3 discusses the empirical methodology that is applied in this paper to examine
the spillover effects. The data and trading hours of the six markets are described in Section 4. Section 5 explains and discusses the
empirical results. The summary and conclusions are contained in Section 6.

2. Literature review

There exists an extant literature on the information transmission and return and volatility dynamics between the US stock
markets and various stock markets in industrialized countries of Europe and East Asia. Hamao et al. (1990) study the short-term
interdependence of prices and price volatilities across the Tokyo, London, and New York stock markets. They separate the close-to-
close returns into close-to-open and open-to-close returns and find evidence of price volatility spillovers from New York to Tokyo,
London to Tokyo, and New York to London but not vice versa. In this study we have also separated the daily returns into day and
night returns to study the spillover effects to and from US stock market to BRICS and also among BRICS countries. King and
Wadhwani (1990) focus on the stock market crash of 1987 and investigate the transmission of volatility to other markets. They find
that volatility from US is transmitted to other markets despite the fact that economic circumstances in different countries vary widely
and thus provide evidence of international bear-market contagion during the October 1987 crash in the US markets.
Bhar and Nikolova (2009), using bivariate EGARCH and time varying dynamic conditional correlation, conclude that BRICs
show relatively low level of market integration with the rest of the world. They argue the reason could be the integration process is
still evolving. Because of BRIC countries having low extent of integration with the world and low correlation with other stock
markets, portfolio investors have a chance to earn sound returns from investing into BRIC's stocks. Moreover, Xu and Hamori
(2012) investigate the causality-in-mean and causality in variance between stock prices of BRIC countries and that of USA by
dividing the sample into pre-and-post financial crisis. In particular, they focus on the impact of the US financial crisis of September
2008, which is triggered by the emergence of sub-prime loan losses in 2007, on the dynamic linkages between the stock prices of the
BRICs and the United States. They conclude that the dynamic linkage has weakened after the US (and later global) crisis in 2008.
The possible reason for the weak transmission could be an indication that the crisis might have changed the investors’ behavior (i.e.,
transferring the funds from stock markets to commodity markets such as gold and petroleum), as argued by the authors.
Shiller, Konya, and Tsutsui (1991) conduct a survey with institutional investors in Japan and find that the crash in US is the
major cause of crash in Japan as Tokyo participants are in general influenced by the trading patterns in New York, but not vice versa.
They find that events in US are the primary cause of the stock market crash in Japan. The findings hint at world market culture
where behavior, outlook and communication go well beyond national borders. Several studies including Bennett and Kelleher
(1988), Becker, Finnerty, and Tucker (1992), Hamao et al. (1990), and Susmel and Engle (1990) report that correlations in volatility
and prices appear to be causal from the United States to other countries and the lagged spillovers of price changes and price volatility
are found between major markets.
Lin, Engle, and Ito (1994) use the GARCH framework to take into account the conditional heteroskedasticity inherent in the US
(NYSE) and Japanese (Nikkei) stock index time series. They use aggregate shock model to explain the incorporation of information
(night returns) in the opening prices in the domestic market from the foreign market. They also use signal extraction model to
decompose surprise factors into global factors and local factors. They find that Japanese (US) daytime returns are correlated with the
US (Japanese) overnight returns.
Dornau (1998) and Peiro, Quesada, and Uriel (1998) analyze the transmission of information among the daily returns of the US,
Japanese, and German stock markets, but ignore the potential temporal dependence among the volatilities of the three markets. Lee,
Rui, and Wang (2004) investigate the linkages between the daily returns and volatility of the NASDAQ and Asian markets using the
EGRARCH and VAR-based models, and find strong evidence of lagged returns and volatility spillovers from the NASDAQ market to
the Asian markets. They find evidence of substantial cross-country industry effect (or meteor shower effect) as well as domestic
market effect (or heat wave effect).
Baur and Jung (2006) use a variant of aggregate shock model to examine the spillover effects between the US and German stock
markets around the opening of the two markets and find that foreign daytime returns in the foreign country (US) influence the
domestic (German) overnight returns and vice versa. However they do not find evidence of volatility spillovers from the previous
daytime returns in the US to the DAX (German) morning trading. Our econometric model is based on a variant of the aggregate-
shock model of Lin et al. (1994), and is similar in spirit to that of Baur and Jung (2006). Sarwar and Bhuyan (2009) looks at the
spillover effect between the US and BRIC for a period of 1995 to 2007 and observe t significant spillover effect on BRIC countries.
In a comprehensive study, Beirne, Caporale, Schulze-Ghattas, and Spagnolo (2010) investigate the spillover linkage between 41
emerging market economies, and aggregate global and regional markets. Using tri-variate VAR-GARCH framework, the authors
show that spillovers from regional and global markets are present in the majority of emerging economies. In addition, they find that
spillovers in mean returns dominate in emerging Asian and Latin American markets, however, spillovers in variance appear to
dominate in emerging European markets.
Korkmaz, Çevik, and Atukeren (2012) investigate return and volatility spillovers in CIVETS (Colombia, Indonesia, Vietnam,
Egypt, Turkey and South Africa; the term coined in 2009) countries. Using Hong's (2001) version of Cheung and Ng's (1996)
causality-in-mean and causality-in-variance the authors find that contemporaneous correlations among those countries (after
filtering out ARCH effects and common factors) are mixed - volatile, low and sometimes negative. In addition, contrary to findings in

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such grouped economies, stock markets in CIVETS do not show contagion rather they show interdependence effects.
Tamakoshi and Hamori (2014a) investigate volatility changes in the 10-year Greek sovereign bond index returns using the
multiple structural break tests developed by Perron and Bai (1998, 2003) to detect the break dates in volatility and incorporate them
into an exponential GARCH (EGARCH) model which allows for endogenous identification of break dates. Results show that for the
Greek government bond returns, the structural break date in the variance and mean is April 2010. Incorporating structural break
dummy variables into EGARCH-based model results in superior estimation, and the positively significant coefficient of the dummy
variable on structural break in variance suggests that the regime shift was triggered by the European sovereign debt crisis. Moreover,
Tamakoshi and Hamori (2014a, 2014b) find that volatility persistence decreases substantially when incorporating the structural
change into the model consistent with the finding of Coverubias, Ewing, Hein, and Thompson (2006). They also obtain evidence of
performance improvement in their modeling by including structural break dummies into the variance equation. They observe sharp
drops in volatility persistence after incorporating the structural change. Their findings are important for not only investors who
assess the volatility of sovereign bonds for portfolio risk management, but also for policy makers who wish to understand and
minimize the impacts of excess volatility on the financial system in government bond markets.
Tamakoshi and Hamori (2014b) examine volatility and mean transmissions between the US dollar (USD) and euro (EUR)
LIBOR-OIS spreads using the new cross-correlation function (CCF) approach developed by Hong (2001) and AR-EGARCH model.
Interestingly, during the global financial crisis period, despite the apparently bidirectional causality-in-mean observed between the
two spreads, they find evidence of significant unidirectional causality-in-variance from the EUR to the USD spread, implying
information flows driven by the funding behaviors of European financial institutions. On the other hand, during the recent European
sovereign debt crisis, Tamakoshi and Hamori (2014b) detect no significant causality-in-mean and causality-in-variance between the
spreads.
Nakajima and Hamori (2013) perform causality test between wholesale electricity prices and natural gas and oil prices in the
United States using the LA-VAR technique developed by Toda and Yamamoto (1995) and the CCF approach proposed by Cheung
and Ng (1996). This study tests and confirms the causality hypothesis: Changes in natural gas prices are useful for predicting
changes in electricity prices, which most prior research supports. The results of both LA-VAR and CCF tests indicate a unilateral
causality-in-mean from natural gas prices to wholesale electricity prices at the 1% significance level. These results are consistent with
almost all of the previous studies. They asserts that it is reasonable to assume, as Emery and Liu (2002) pointed out, that it is the
common practice followed by power generating companies to use natural gas as a marginal fuel for producing power during peak
hour.

3. Methodology

In order to estimate return, we consider natural logarithm of index price of each series excluding any dividend payments.
Following similar modeling structure of Sarwar and Bhuyan (2009), returns for day, night, and daily are calculated in chronological
order addressing the opening times of the six markets. We then divide the daily close-to-close returns into overnight returns
(previous close-to-open) and daytime returns (open-to-close) as follows:

Rt=ln(CSt/CSt-1) (1)

RNt=ln(OSt/CSt−1) (2a)

RDt=ln(CSt/OSt) (2b)

Rt=RDt+RNt (2c)

Where Rt is the close-to-close return at time t, CSt and CSt–1 are the respective closing stock index values at time t and t–1, OSt is the
opening stock index value at time t, RNt is the overnight previous close-to-open return at time t, and RDt is the daytime open-to-
close return.
Econometric model, used in this paper, is followed closely with some modifications that of Lin et al. (1994) and Baur and Jung
(2006). It is important to point out that since correlations in volatility and prices appear to be causal from the US to other countries
and lagged spillovers in returns and volatility are found between major markets (Bennett & Kelleher 1988; Becker, Finnerty, &
Tucker 1992; Hamao et al., 1990; Susmel & Engle, 1990), we design our model to capture the transmission effect of the overnight
returns in the BRICS stock markets with the latest US daytime returns and the relevant latest BRICS daytime (or overnight) returns
depending on the opening time sequence of the BRICS markets. The US latest daytime return is useful to traders in the BRICS
markets since the US stock market closes before the opening of the stock markets in China and India, and opens before the closing of
stock markets of Russia and South Africa. The trading time of Brazilian stock market almost coincides with the US stock market. We
hypothesize in our model that the US overnight returns are affected by the latest (one-period lagged) daytime returns of China and
the latest US daytime returns. We choose the Chinese returns out of the four BRICS returns because US has large trade and
investment relations with China (relative to India, Brazil, or Russia) and because the Chinese stock market is the largest equity
market of the four BRICS economies in terms of its capitalization. Further, the Chinese stock market closes before the US stock
market opens, so Chinese daytime returns are known to participants of the US stock market and when Chinese stock markets open
next day the US daytime returns are known to the Chinese investors. In general, our model for BRICS markets can be written as
follows:

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BRICSNt = μ1 + β1BRICSDt−1 + β2USDt−1 + β3Xt + ε t , with ε t ψt−1~N(0, ht) (3)

and

ht = α1 + γ1εt2−1 + γ2ht−1 + γ3USD2t−1 + γ4Xt (4)

USDt = ν1 + ξ t , with ξ t ψt−1~N(0, gt ) (5)

and

gt = а1 + λ1ξ2t−1 + λ1 gt−1

The Eqs. (3)–(5) for the US market can be expressed in similar fashion by simply replacing BRICSNt with USNt and USD2t−1 with
= D⌈nj ⌉Y⌈nj ⌉, at r = r⌈j ⌉ in Eqs. (3) and (4), and USDt with BRICSDt in Eq. (5). µ1 and α1 in Eqs. (3) and (4) are the constants of
M⌈nj ⌉
the mean return and variance, respectively, BRICSNt is the overnight return of the BRICS stock markets at time t, BRICSDt–1 is the
daytime return of the BRICS markets at time t–1, USDt is the US stock market’s daytime return at time t, the regressor Xt captures
possible additional effects on the BRICS overnight return and variance (e.g., Chinese returns as a regressor for India’s overnight
returns and vice versa), N(, . ,) denotes a normal distribution, and ht is the conditional variance. The idea follows for other countries
as well in deriving equivalent of Eqs. (3)–(5). It is important to point out that the US stock market shock enters the BRICS stock
markets through the mean return Eq. (3) and volatility Eq. (4) in the form of lagged US squared returns. In the same spirit, the
BRICS market shock enters the US stock market through the US mean return equation and the US volatility equation. This structure
of foreign shock transmission is different from that used in Lin et al. (1994) and our focus is in estimating Eqs. (3) and (4) using the
quasi-maximum likelihood procedures under the GARCH framework, as suggested by Baur and Jung (2006). We have run the
EGARCH model on our data set and compared the results with the GARCHmodel. We have found GARCH(1,1) framework produces
consistent and better estimates than EGARCH. In some instance, such as,while using night return series, EGARCH optimization
cannot even converge. Moreover, the leverage effect in EGARCH is negativeand dominated by symmetric effect that tells us the
absence of asymmetry in our data. In case the asymmetric return series, EGARCH would be a more appropriate model. The plausible
reasons that GARCH instead of EGARCH is a better fit in our case are: (a) there is no well-defined trend (either positive or negative)
in our sample period, (b) no structural break is found in our data afterapplying a battery of tests, (c) our return series behave very
consistently, i.e., no explosion of return is found and almost in all thetrading days, returns are bounded by +/− 10%, and (d) we
computed returns using the ratio of natural log (ln) of today’s stock priceto yesterday’s stock price that makes the return series log-
normal and therefore is not suitable to use in an EGARCH framework.
Our full transmission model is jointly defined through Eqs. (3) and (4) in order to test two hypotheses: (1) the overnight returns
in the BRICS stock markets are influenced by the latest US market’s daytime returns and the latest (one-period lagged) BRICS
daytime returns, and (2) the US overnight returns are related to the latest daytime returns of China, India and Russia. A special case
of the aggregate shock model in equations (3) and (4) can be obtained by setting γ3 and γ4 to be zero in equation (4). The resulting
model, referred to here as the mean transmission model, is as follows:
BRICSNt = μ1 + β1BRICSDt−1 + β2USDt−1 + β3Xt + ε t , with ε t ψt−1~N(0, ht) (6)
and

ht = α1 + γ1 ε 2t−1 + γ2ht−1 (7)

Eqs. (6) and (7) are our mean transmission model and these equations ignore the possible volatility transmissions between the US
and BRICS stock markets, however, it captures the effects of the US market on the mean return of the BRICS markets. In addition,
model in Eqs. (3) and (4) obtains another special case when β2 and β3 are restricted to zero in Eq. (3). The volatility transmission
model applied in our paper can be displayed as follows:
BRICSNt = μ1 + β1BRICSDt−1 + ε t , with ε t ψt−1~N(0, ht) (8)
and

ht = α1 + γ1 ε 2t−1 + γ2 ht−1 + γ3 USD2t−1 + γ4 Xt (9)

Our volatility transmission model in Eqs. (8) and (9) concentrates only on the transmission of the US market shock to the
conditional variance of BRICS markets. We measure the full transmission model as well as the restricted mean transmission model
and the volatility transmission model in order to provide comparative results to previous studies on this topic.

4. Data and trading hours

The data is collected from the Global Financial Database. Daily opening and closing values for the indices of US, Brazil, Russia,
India, China, and South Africa are collected for the period January 1999 to December 2012. Using fourteen years’ stock market daily
data, it provides us the opportunity to study the long-term relationships among the BRICS markets. It also includes some of the
special events that took place during this time period even though we are not specifically studying the effects of those events. We
have included the most up-to-date data as of the time we started our work on this research in 2013.
The use of open and close prices is expected to reduce the effect of non-synchronous trading on the return and volatility linkages

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Table 1
Trading hours of BRICS and US markets.

Markets Greenwich Time Local Time US Eastern Time Difference with US Eastern Open and Close Relative to
(day) Time US Market

USA 13:30–20:00 (t) (GMT –4) 9:30–16:00 9:30–16:00 (t) — —

Brazil 13:00–20:00 (t) (GMT –2) 11:00– 9:00–16:00 (t) 2 h ahead Closes at the same time of US
18:00 close
China 1:30–3:30, 5:00-7:30 (t) 9:30–11:30, 21:30–23:30 (t-1), 12 h ahead Closes before US markets open
(GMT +8) 13:00-15:30 01:00-3:30 (t)
India 4:00–11:00 (t) 9:30–16:30 00:00–7:00 (t) 9½ h ahead Closes before US markets open
(GMT +5:30)
Russia 6:15–15:05 (t) (GMT +4) 10:15– 02:15–11:05 (t) 8 h ahead Closes 1½ h after US markets
19:05 open
South Africa 07:00–15:00 (t) (GMT +2) 09:00– 03:00–11:00 (t) 6 h ahead Closes 1½ h after US markets
17:00 open

Notes: The table reports the trading hours of BRICS and US market. US market is reported in US Eastern time. In addition to showing the local time for each country,
we also show the in Greenwich time.

between the US and four BRICS stock markets. The five stock market indices are as follows: S & P 500 index for US, Shangai SE
Composite index for China, Bombay Sensex index for India, Bovespa index for Brazil, RTSI composite index of Russia, and JSE index
of South Africa. If the US or any of the five BRICS markets is closed on a particular day due to a national holiday while the other
markets are open, then we set the return of that market to zero to recognize the absence of a response in that market to the global
stock market news. The data provides 3667 daily closing and opening observations for each of the six equity markets (including US)
which were used to estimate the daily, overnight and daytime returns.

Table 2
Descriptive statistics of BRICS stock markets.

Panel A: Daily Return

Country (Equity Index) USA (S & P 500) Brazil (Bovespa) China (Shanghai Composite) India (Sensex) Russia (RTSI) South Africa (JSE)

Mean Ret. (%) 0.004 0.059 0.019 0.050 0.088 0.056

Std. Dev. (%) 1.310 1.944 1.578 1.628 2.373 1.249
Risk-Return Ratio 0.003 0.030 0.012 0.031 0.037 0.045
Skewness −0.155 0.761 −0.042 −0.132 −0.322 −0.168
Kurtosis 10.530 19.396 7.586 9.336 11.122 6.737
LB(6) 35.246* 15.219* 22.474* 20.045* 50.308* 35.902*
LB(12) 47.127* 18.959* 30.990* 52.005* 64.675* 46.223*
ρ1 −0.080 0.006 −0.005 0.044 0.111 0.057
N 3667 3667 3667 3667 3667 3667

Panel B: Day Return

Mean Ret. (%) 0.008 0.046 0.043 −0.097 0.027 0.040
Std. Dev. (%) 1.271 1.932 1.463 1.468 2.066 1.092
Risk-Return Ratio 0.006 0.024 0.026 −0.066 0.013 0.037
Skewness −0.180 0.789 −0.165 −0.558 −0.301 −0.126
Kurtosis 10.013 20.613 6.508 7.384 14.155 8.880
LB(6) 33.537* 14.566* 48.318* 40.222* 31.365* 37.004*
LB(12) 43.548* 17.533* 56.160* 71.709* 45.724* 43.271*
ρ1 −0.076 −0.006 −0.094 −0.067 0.084 0.034
N 3667 3667 3667 3667 3667 3667

Panel C: Night Return

Mean Ret. (%) −0.004 0.013 −0.024 0.147 0.062 0.017
Std. Dev. (%) 0.122 0.155 0.640 0.837 1.008 0.608
Risk-Return Ratio −0.033 0.084 −0.038 0.176 0.062 0.028
Skewness −0.636 0.0035 2.958 −0.157 0.180 −0.263
Kurtosis 28.967 390.352 52.559 19.794 31.079 27.492
LB(6) 79.379* 227.03* 66.380* 10.340* 6.535* 100.77*
LB(12) 115.66* 250.82* 85.125* 79.487* 45.144* 133.93*
ρ1 −0.124 −0.080 0.064 0.023 −0.003 0.134
N 3667 3667 3667 3667 3667 3667

Notes: The mean returns are from the daily closing index values from January 1999 to December, 2012. The six equity market indices are: S & P 500 index of US,
Shanghai Composite index of China, Bombay Sensex index of India, Bovespa index of Brazil, AK & M composite index of Russia and JSE index of South Africa. LB(k)
is the Ljung-Box test of significance for autocorrelation at k lags and ρ1 is the first-order autocorrelation coefficient.
*
The asterisk indicates significance at the 1% level.

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Table 1 provides the trading hours sequence of the US stock market and the stock markets of Brazil, Russia, India, China and
South Africa (BRICS) using the Greenwich time and US Eastern time from day t-1 to day t+1. The chronological order of the opening
of the five markets is China, India, Russia, South Africa, Brazil, and US. The Brazilian stock market opens half an hour before the US
market and closes at the same time as the US market, and thus the US and Brazilian markets have six and half hours of overlapping
trading hours. The Chinese stock market opens thirteen hours and closes six hours before the opening of the US market. The Chinese
market opening is followed by the Indian stock market which in turn is followed by the Russian stock market. The Indian stock
market opens nine and half hours and closes two and half hours before the opening of the US market. The Russian stock market
opens seven hours and fifteen minutes before and closes one and half hours after the opening of the US market. The South African
market opens six and half hours before and closes one and half hours after the opening of the US market. The Chinese, Indian,
Russian, and South African stock markets have some overlapping trading hours. Given this trading hour sequence, the US daytime
returns are known to traders before the opening of the stock markets in China, India, and Russia.

5. Empirical results

5.1. Descriptive statistics

Table 2 provides the descriptive statistics of the US and BRICS stock markets for daily, day and night returns. In Panel A, daily
return statistics are presented and it is observed that the mean daily return for the sample period of January 1999 through December
2012 is the highest at 0.088 percent for Russia (22.18% annualized), followed by Brazil at 0.059 percent (14.87% annual), South
Africa at 0.056 percent (14.11% annualized), India at 0.050 percent (12.6%), China at 0.019 percent (4.79%) and USA at 0.004
percent (1.01%).1 However, when risk-reward ratio is estimated, South Africa stands out to be the best country with highest ratio of
0.045 followed by Russia, India, Brazil, China and USA. This clearly gives investors an edge to invest in South Africa followed by
Russia, India, and Brazil. China and the USA offer the least attractive risk-return ratio among these countries. The skewness and
kurtosis values indicate that the return distributions deviate significantly from a normal distribution as reflected in their significant
skewness and kurtosis. The Ljung-Box tests of autocorrelation at lags 6 and 12 do not support the absence of significant
autocorrelation among the daily return series of US and BRICS stock markets. The day return distributions, shown in panel B,
display the similar characteristics as the daily returns. However, in night return, the risk-reward ratio is highest for India (0.176)
followed by Brazil, Russia, and South Africa.

5.2. Full transmission model

In this section, we present the detail empirical results on the volatility transmission of BRICS countries as well as the volatility
transmission with the US stock market. Depending on the time sequence of market opening and closing in all six markets (including
US), we investigate the volatility transmission in three types of returns: daily returns (close to close), night returns (previous day
close to next day open), and day returns (open to the close of the same day). Then under the full transmission model, we investigate
the volatility effects in two separate combinations: (1) the effect of US market on all the BRICS markets and (2) the effects of all
BRICS markets as well as US market on all BRICS markets.
Table 3 above presents the results of the full transmission model for daily, day and night returns which incorporates the effect of
US market on all five BRICS markets and Table 4 below similarly shows the effect of all BRICS markets as well as US stock market on
both the return and volatility of all BRICS markets. To estimate the daily return and volatility effects in Eqs. 3 and 4, we use the one-
day lag returns as the exogenous variables. For the day returns, we use the same-day night returns and for the night returns, we use
the previous day returns as the exogenous variables. Since Chinese and Indian markets do not have any overlapping trading time
with the US market, we estimate the return and volatility effect on these markets’ returns by using the contemporaneous daily US
returns. The results in Table 3 for the daily returns indicate that the latest US daytime returns affect significantly the mean overnight
stock returns in China, India, Russia and South Africa, except Brazil. However, the daily volatilities of all countries are significantly
affected by the previous day volatility of US market. The Table 3 also shows that both returns and volatilities of day trading of all
countries are significantly affected by the night returns of US market. Similarly, the night returns and volatilities of all BRICS
markets are significantly affected by the previous day returns of US market. It is also important to mention that the coefficients for γ1
(ARCH term) and γ2 (GARCH term) are significant for all markets in all three types of returns (daily, day and night). Additionally,
the sum of γ1 and γ2 for all markets are close to unity indicating that the persistence of volatility shocks continues and does not
diminish much over time. The above results show that US markets have significant effect on both the return and volatility of all
BRICS markets both under close-to-close daily return as well as night return. Since US stock market is the largest and most active
equity market in the world, the US market effect on the BRICS markets capture the global market effect. Table 4 presents the results
on the full transmission model where all BRICS markets as well as the US market are included. Similar to Table 3, Table 4 also shows
the results for three trading times (daily, day and night) returns. In panel a, the daily returns of Brazil is significantly affected by the
one-day lag returns of all countries except China and Russia. However, the volatility transmission from US, Russia and Brazil's own
one-day lag returns is significant on Brazilian market volatility. Russian market return and volatility are significantly affected by all
markets except India (in case of return) and South Africa (in case of volatility). Indian return is significantly affected by US, Brazil,

1
To calculate the annualized return, a 252-day trading days is used.

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Table 3
Parameter estimates of return and volatility for each of the BRICS countries with its own and US one-day lag returns. The model is based on GARCH(1,1) under full
transmission model.

Panel a: Daily Return

Mean Equation

Parameters Brazil Russia India China South Africa

α0 0.0005** 0.0014* 0.0010* 0.0002 0.0008*

USt-1 0.0183 0.3541* 0.2433 0.1061* 0.2775*

Variance Equation
β0 8.79E-06* 9.70E-06* 4.56E-06* 3.41E-06* 2.56E-06*
β1 0.050* 0.0854* 0.106* 0.0670* 0.0702*
β2 0.921* 0.894* 0.878* 0.921* 0.910*
USt-1 −0.002* −0.002* −0.0007* −0.0003* −0.0008*
Log likelihood 9748.893 9273.509 10532.28 10413.34 11507.32

Panel b: Day Return

Mean Equation
Parameters Brazil Russia India China South Africa
α0 0.0007* 0.001* −0.0002* 0.0003* −1.20E-06*
USNt 2.958* 4.174* 2.197* 1.347* 0.623*

Variance Equation
β0 7.47E-06* 8.74E-06* 5.39E-06* 2.95E-06* 4.89E-10*
β1 0.068* 0.099* 0.130* 0.063* 0.239*
β2 0.905* 0.875* 0.845* 0.923* 0.853*
USNt −0.009* −0.009* −0.004* −0.003** 1.91E-06*
Log likelihood 9812.323 9844.331 10844.83 10664.5 15811.11

Panel c: Night Return

Mean Equation
Parameters Brazil Russia India China South Africa
α0 −8.72E-05* 4.21E-05 0.0010* −0.0001* 1.06E-07
USDt-1 0.001** 0.056* 0.197* 0.062* 0.0003*

Variance Equation
β0 2.12E-08* 4.44E-07* 5.36E-07* 1.05E-07* 7.26E-11*
β1 0.247* 0.189* 0.167* 0.076* 0.243*
β2 0.850* 0.842* 0.849* 0.943* 0.593*
USDt-1 1.20E-06* −1.55E-05* −0.0001* −4.43E-05* 1.90E-09*
Log likelihood 21935.75 14444.66 14118.95 14475.4 29428.07

Notes:
1. The symbol *** indicates significance at the 10% level.
2. The variables are defined as follows: USD and USN are daytime and night return for US.
*
Indicate significance at the 1% level.
**
Indicate significance at the 5% level.

and China (not by its own lag) and its volatility is significantly affected by all markets except Russia and South Africa. Surprisingly,
while China's volatility is affected by all markets except the US market, the return is affected only by US and Brazil (not by its own
lag). The return of South Africa is affected by US, Brazil and Russia, its own lag and the volatility is affected by all countries except
Brazil and Russia. It is observed in these results that the return and volatility of each market have cross-effect from the other
markets. Another interesting observation from these results is that the daily return of India and China market is not affected by its
own one-day lag return. These findings are important from the perspective of volatility transmission where each market (including
US) individually affects other markets as well as the one-day lag return affects the next day return and volatility.

5.3. Mean transmission model

We also investigate a special case of the aggregate shock model that we have presented in Eqs. (3) and (4) by setting γ3 and γ4 to
be zero in Eq. (4). We call this variation in the model specification as the mean transmission model and are presented in Eqs. (6) and
(7). The mean transmission model ignores the possible volatility transmissions between the US and BRICS stock markets, but it does
capture the effects of the US market on the mean return of the BRICS markets.2 Table 5 below presents the results of the restricted
mean transmission model in which the spillover effects from the US stock market to the BRICS stock markets enter through the

2
In Table 5, we present the results on mean transmission for all countries including US. We have also run the model for each of the countries separately with the
US and all countries excluding the US. The results are somewhat similar to those presented in Table 5.

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Table 4
Parameter estimates of return and volatility for each of the BRICS countries with its own, US and other BRICS countries’ one-period lag returns. The model is based
on GARCH(1,1) full transmission model.

Panel a: Daily Returns

Mean Equations

Parameters Brazil Russia India China South Africa

α0 0.0004*** 0.001* 0.0006* −0.0004 0.001*

USt-1 0.033* 0.226* 0.182* 0.056* 0.236*
BRt-1 −0.002* 0.159* 0.059* 0.038* 0.068*
CHt-1 0.009 −0.047* −0.022*** −0.011 0.002
INt-1 0.050* 0.008 0.028 0.004 −0.003
RUt-1 −0.005 0.036** −0.002 0.015 −0.019*
SAt-1 −0.045*** −0.063** 0.025 0.030 −0.031***
Variance Equation
β0 0.00001* 0.00001* 0.000006* 0.000004* 0.000003*
β1 0.055* 0.088* 0.108* 0.071* 0.061*
β2 0.911* 0.893* 0.863* 0.915* 0.918*
USt-1 0.0001* −0.001* −0.0005* −0.0001 −0.0005*
BRt-1 −0.0008* 0.0002 0.0002* −0.00008 0.00004
CHt-1 0.0002 0.0004* 0.0001 −0.0004* 0.00009**
INt-1 −0.00004 −0.0004** −0.001* 0.0003* −0.0002*
RUt-1 0.0003* −0.0008* 0.00007 8.05E-05 0.00003
SAt-1 −0.0002 −0.00002 −0.0002 −0.0003** −0.0004*
Log-likelihood 9764.82 9320.003 10566.09 10430.6 11547.95

Panel b: Day Returns

Mean Equations
Parameters Brazil Russia India China South Africa
α0 0.0005** −0.0002 −0.0002 0.00007 0.0001
USNt 2.879* 5.151* 2.218* 1.280* 3.0009*
BRNt 0.748* 0.991* 0.322** −0.060 0.119
CHNt 0.003 0.157* 0.004 −0.100* 0.009
INNt 0.101* 0.195* −0.139* 0.127* 0.0353**
RUNt 0.051 0.096* 0.027 −0.021 −0.010
SANt 0.147* 0.219* 0.145* −0.069 −0.0043
Variance Equation
β0 0.000007* 0.0002* 0.000005* 0.0001* 0.000008*
β1 0.067* 0.165* 0.127* 0.141* 0.399*
β2 0.906* 0.443* 0.848* 0.397* 0.599*
USNt −0.0105* 0.013** −0.004* 0.0003 −0.0009*
BRNt 0.0012 −0.015* −0.001 −0.007* −0.0007*
CHNt 0.0003 0.008* 0.0003*** 0.0003 −0.0002**
INNt 0.0003 −0.002** 0.00008 −0.0008** −0.0001*
RUNt 0.00005 −0.001** −0.0003** −0.002* −0.0001*
SANt −0.0013* −0.005* −0.00002 −0.003* −0.00009*
Log-likelihood 9835.508 9458.182 10861.48 10374.8 12689.25

Panel c: Night Returns

Mean Equations
Parameters Brazil Russia India China South Africa
α0 0.0005* −0.0001 −0.0001* 7.21E-05** 0.0001
USDt-1 2.8788 5.1512* 2.2179* 1.2801* 3.0009*
BRDt-1 0.7476** 0.9908* 0.3223* −0.0597* 0.1187
CHDt-1 0.0028 0.1573** 0.0037** −0.0998* 0.0090
INDt-1 0.1006 0.1953 −0.1387* 0.1267 0.0353
RUDt-1 0.0513 0.0965* 0.0272 −0.0211** −0.0104
SADt-1 0.1473 0.2194* 0.1446 −0.0686*** −0.0043**
Variance Equation
β0 0.000007* 0.0002* 0.000005* 0.0001* 0.000008*
β1 0.0668* 0.1647* 0.1275* 0.1412* 0.3995*
β2 0.9064* 0.4430* 0.8480* 0.3969* 0.5988*
USDt-1 −0.0105 0.0132* −0.0044* 0.0003* −0.0009*
BRDt-1 0.0012 −0.0152** −0.0010* −0.0070* −0.0007*
CHDt-1 0.0003* 0.0079* 0.0003*** 0.0003* −0.0002*
INDt-1 0.0003* −0.0017* 0.00008* −0.0082* −0.0001
RUDt-1 0.00005 −0.0013 −0.0003 −0.0017* −0.0001
SADt-1 −0.0013* −0.0053* −0.00002* −0.0035* −0.00009*
Log-likelihood 9835.508 9458.182 10861.48 10374.8 14266.94

*
The symbols indicate significance at the 1% level.
**
The symbols indicate significance at the 5% level.
***
The symbols indicate significance at the 10% level.

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Table 5
Parameter estimates of return and volatility for each of the BRICS countries with its own, other BRICS countries and US one-day lag returns. The model is based on
GARCH(1,1) under mean transmission model.

Panel a: Daily Return

Mean Equation

Parameters Brazil Russia India China South Africa

α0 0.0008* 0.0014* 0.0009* 0.0001 0.0008*

USt-1 0.0312 0.2238* 0.1715* 0.0549** 0.2395*
BRt-1 −0.0065 0.1592* 0.0625* 0.0403*** 0.0639*
CHt-1 0.0016 −0.0544* −0.0279** −0.0127 −0.0002
INt-1 0.0519* 0.0065 0.0204 0.0030 0.0052
RUt-1 −0.0007 0.0408** −0.0030 0.0164 −0.0234*
SAt-1 −0.0425 −0.0681** 0.0334*** 0.0303 −0.0278

Variance Equation
β0 7.82E-06* 8.59E-06* 4.41E-06* 3.13E-06* 2.42E-06*
β1 0.0705* 0.0948* 0.1144* 0.0658* 0.0873*
β2 0.9042* 0.8881* 0.8715* 0.9228* 0.8948*
Log likelihood 9706.727 9288.972 10528.91 10417.67 11498.86

Panel b: Day Return

Mean Equation
Parameters Brazil Russia India China South Africa
α0 0.0006** 0.0005** −0.0001 0.0001 6.25E-06
USNt 2.8584* 4.1210* 2.1459* 1.2784* 2.8404*
BRNt 0.6565* 1.1081* 0.3448** −0.0297 0.0016
CHNt −0.0026 0.0571** 0.0052 −0.0642** −0.0003
INNt 0.0917* 0.2240* −0.1343* 0.1042* −0.0002
RUNt 0.0458 0.1467* 0.0327*** 0.0231 0.0002
SANt 0.1644* 0.1742* 0.1372* −0.0342 0.0010

Variance Equation
β0 7.37E-06* 8.23E-06* 5.28E-06* 2.88E-06* 1.90E-08*
β1 0.0704* 0.1030* 0.1302* 0.0647* 0.2676*
β2 0.9045* 0.8735* 0.8462* 0.9224* 0.8023*
Log likelihood 9821.124 9916.001 10854.53 10668.09 14571.98

Panel c: Night Return

Mean Equation
Parameters Brazil Russia India China South Africa
α0 3.14E-06 7.94E-05*** 0.0010* −8.74E-05* 1.94E-06*
USDt-1 −0.0034* 0.0364* 0.1574* 0.0382* 0.0004*
BRDt-1 0.0009* 0.0239* 0.0349* −8.38E-05 −0.0003*
CHDt-1 −0.0004* 0.0066** −0.0029 0.0774* 2.98E-05
INDt-1 −0.0020* 0.0154* 0.0233* 0.0022 0.0002*
RUDt-1 −0.0004** −0.0095* 0.0066*** 0.0035 7.95E-05*
SADt-1 0.0013* −0.0335* 0.0033 0.0108** −0.0002*

Variance Equation
β0 1.73E-10* 3.90E-07* 4.28E-07* 4.70E-08* 5.01E-11*
β1 0.1567* 0.2185* 0.1802* 0.0948* 0.2200*
β2 0.9074* 0.8267* 0.8451* 0.9420* 0.6537*
Log likelihood 23207.46 14518.26 14136.08 14551.65 29590.74

The variables are defined as follows: BRD, CHD, IND, RUD, SAD and USD are the daytime return of Brazil, China, India, Russia, South Africa and United States
respectively.
*
Indicate significance at the 1% level.
**
Indicate significance at the 5% level.
***
Indicate significance at the 10% level.

mean return equation but not through the volatility equation. We investigate the mean transmission for three different trading
times: daily, day and night.
The results of the mean transmission model for daily trading time are somewhat similar to those of the full transmission model in
Table 4 with few exceptions. The results show that daily returns of Brazil are affected by the one-day lag returns of India only. All
other markets do not have any significant effect on the Brazilian daily returns. Russian daily returns are significantly affected by one-
day lag returns of US, Brazil, China, Russia and South Africa. The only market that does not significantly affect Russian returns is
India. The latest US daytime returns have significant spillover effects on the overnight returns of China, India, Russia and South
Africa which are also significantly influenced by their own latest daytime returns.

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However, in contrast to the full transmission model in which the Brazilian overnight returns are influenced by the Russian
daytime returns and by the US daytime returns through the Russian volatility process, the Russian overnight returns under the
restricted mean transmission model are neither affected by the latest US daytime returns nor by the latest Russian daytime returns.
Hence, the restricted mean transmission model does not appear to adequately capture the return and volatility processes of the
Russian stock market. The Indian daily returns are significantly affected by one-day lag returns of all markets except India's own and
Russian one-day lag returns. For China, one-day lag returns of only US and Brazil have significant effects on its daily returns. All
other markets do not have any significant effect on China's daily returns. The daily returns of South Africa are significantly affected
by US, Brazil, China and Russia. One observation from these results is that the one-day lag returns of all markets except Russia do
not have any significant effect on its own daily returns.
Under the mean transmission model, when we use the overnight return to estimate the effect on the day return, the results are
more significant compared to results under the daily returns. Most of the coefficients are significant except China on Brazil and India,
Russia on China, and all countries except US on South Africa. We find the similar results when mean transmission effects are
estimated day return to estimate the effect on the night return. Only few of the countries do not show significant mean transmission
effect. Those are China and South Africa on India, Brazil, India and Russia on China, and China on South Africa. Note that each
country's own day return has a significant transmission on it night return.
The results basically indicate that all markets are inter-related to one another and there are cross-effects between the markets.
The results do not clearly identify if there is any one directional effect of one market on another.

5.4. Volatility transmission model

In addition to the mean transmission, we also investigate the volatility transmission where β2 and β3 are restricted to zero in Eq.
(3). Under this model, we attempt to capture the volatility shock on the BRICS markets only through the conditional variances of all
countries. The results of the restricted volatility transmission model are presented in Table 6. The volatility transmission model
allows for the market shock to enter the BRICS markets through the BRICS volatility equations but not through the BRICS return
equations. The results of the volatility transmission model are somewhat similar to those of the full transmission model in Table 3.
The coefficient of US market effect, estimated for daily returns against the one-day lag returns, on the volatility of BRICS stock
returns, as shown by the squared US daytime returns, is significant in the volatility equations of Brazil, Russia, India South Africa
under daily returns. As under the full transmission model, the Brazilian, Russian, Indian, Chinese, and South African daily returns
are still significantly affected by their own latest daytime returns. Similar results are found when we estimate the volatility
transmission by using day and overnight returns. In terms of cross-country volatility effects, most of the markets significantly affect
other markets except in few cases. For example, under the daily returns, Brazilian volatility is not affected by one-day lag returns of
China, India and South Africa. The results of other markets are also somewhat mixed. For example, the results show that the
volatility of Russia is not significantly affected by Brazil and South Africa, volatility of India is not significantly affected by Russia and
South Africa, volatility of China is not affected by US, and the volatility of South Africa is not affected by Brazil and Russia. So, it is
seen from these results that Brazil, Russia and South Africa are not much affected by one another.
When the overnight return is used to estimate the volatility effect on the day return, we find that the most of the countries’
volatility is affected by other countries except India whose volatility is affected only by Russia. When we review the results of other
countries, we find that the volatility of Brazil is affected by all countries except China, the volatility of Russia is affected by all
countries except India and South Africa, the volatility of China is affected by all countries except its own overnight return and US
overnight return, the volatility of South Africa is affected by all countries except US and China. As we have found under the full
transmission model, these results suggest that all BRICS countries are inter-related and volatility of one country is affected by other
countries either with close-to-close daily return estimated against the one-day lag return and/or with day return estimated against
the night return.
We also have estimated the volatility transmission on overnight return using the day returns of all BRICS countries as the
independent variables. There is similar strong evidence that the day returns have significant effect on the volatility of overnight
returns with few exceptions. For example, volatility of Brazil is not significantly affected by day return of US, volatility of Russia is
not significantly affected by day return of Brazil, volatility of India is only affected by day return of Russia, volatility of South Africa is
not affected by day returns of India and Russia.

6. Results and discussions

In this study, since our objective is to investigate the volatility transmission of BRICS countries, we do not estimate how the
BRICS countries affect the return and volatility process of US market. Rather, we include US return as one of the independent
variables. Because US stock market is the largest and most active equity market in the world and the effect of the US market on other
markets’ daily and overnight returns may capture the global market effect. In addition, since both China and India are two emerging
markets in Asia and share long borders, studying the effect of these two countries may provide some insight into their effects on each
other's financial markets.

6.1. GARCH results

In contrast to the positive and significant effects of the US and Indian stock returns on the Chinese overnight returns, the effect of

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Table 6
Parameter estimates of return and volatility for each of the BRICS countries with its own, other BRICS countries and US one-day lag returns. The model is based on
GARCH(1,1) under volatility transmission model.

Panel a: Daily Return

Mean Equation

Parameters Brazil Russia India China South Africa

α0 0.000474*** 0.001479* 0.000862 5.78E-05 0.000762

Variance Equation
β0 1.08E-05* 1.14E-05* 8.24E-06* 3.94E-06* 3.09E-06*
β1 0.0551* 0.0922* 0.1097* 0.0709* 0.0680*
β2 0.9108* 0.8879* 0.8614* 0.9146* 0.9117*
USt-1 −0.0019* −0.0017* −0.0007* −0.0002 −0.0007*
BRt-1 −0.0009* 0.0001 0.0002** −0.0001*** 3.43E-05
CHt-1 0.0002 0.0005* 0.0001 −0.0004* 9.08E-05**
INt-1 −6.17E-05 −0.0004** −0.0012* 0.0003* −0.0002*
RUt-1 0.0003* −0.0008* 7.11E-05 8.57E-05*** 4.66E-05
SAt-1 −0.0003 5.81E-05 −0.0002 −0.0003** −0.0004*
Log likelihood 9760.422 9204.888 10476.13 10405.6 11382.65

Panel b: Day Return

Mean Equation
Parameters Brazil Russia India China South Africa
α0 −0.00041 0.001156* −0.00025 0.000348 0.000542

Variance Equation
β0 0.00017* 1.02E-05* 5.24E-06* 0.0002* 8.11E-05*
β1 0.1769* 0.0990* 0.1233* 0.1049* 0.1387*
β2 0.4222* 0.8757* 0.8567* 0.5221* 0.5288*
USNt 0.01859* −0.0125* −0.0010 0.0004 −0.0014
BRNt −0.0128* −0.0032* −0.0012 −0.0094* −0.0040*
CHNt 0.0011 0.0008* 0.0002 0.0002 −0.0003
INNt −0.0017* −0.0001 −6.90E-05 −0.0020* −0.0020*
RUNt 0.0012** −0.0005** −0.0003*** −0.0017* −0.0009*
SANt −0.0030* −0.0004 −4.54E-05 −0.0041* −0.0008**
Log likelihood 9524.213 9716.377 10776.75 10123.38 11419.55

Panel c: Night Return

Mean Equation
Parameters Brazil Russia India China South Africa
α0 9.21E-05** 0.000337 0.001276* −9.39E 05 0.000259

Variance Equation
β0 6.55E-07* 6.45E-05* 7.21E-07* 2.20E-05* 1.82E-05*
β1 0.1505* 0.1524* 0.1233* 0.1527* 0.1533*
β2 0.5997* 0.5899* 0.8730* 0.5896* 0.5853*
USDt-1 −1.57E-07 −0.0009* −5.43E-05* −0.0003* −0.0002**
BRDt-1 7.99E-06* −7.97E-05 −4.37E-05* −0.0003* −0.0002*
CHDt-1 5.15E-06* −0.0006* 1.73E-05** −0.0005* −0.0002*
INDt-1 8.88E-06* 0.0011* −3.65E-05* 0.0003* 2.57E-05
RUDt-1 4.02E-06* −0.0001 5.64E-06 −0.0003* 3.65E-05
SADt-1 −2.42E-05* −0.0006* −5.54E-05* 0.0004* −0.0003***
Log likelihood 20026.16 11717.82 13743.25 13541.4 14072.77

The variables are defined as follows: BR, BRD and BRN are daily, day and night return of Brazil respectively, CH, CHD and CHN are daily, day and night return
respectively of China, IN, IND and INN are daily, day and night return respectively for India, RU, RUD, RUN are daily, day and night return respectively for Russia,
SA, SAD, SAN are daily, day and night return respectively for South Africa and US, USD and USN are daily, day and night return for US.
*
Indicate significance at the 1% level.
**
Indicate significance at the 5% level.
***
Indicate significance at the 10% level..

the latest Chinese daytime returns on the Chinese overnight returns is negative and significant. This change in sign of the two effects
suggests that Chinese market participants react differently to the local information than to the global and regional information (US
and Indian, respectively). The results also show that the latest US daytime returns affect not only the mean Chinese overnight returns
but also the volatility of the Chinese overnight returns as shown by the negative and significant coefficient of the latest squared US
daytime returns in the Chinese volatility equation. The ARCH and GARCH coefficients in the Chinese overnight volatility equations

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are significant, suggesting that GARCH framework appropriately captures the properties of the Chinese return volatilities. The Chi-
Square normality test for the residuals suggests that the null hypothesis of normally distributed residuals under the GARCH
framework for the Chinese overnight returns cannot be rejected.
The results in Table 3 for the Indian stock market are similar to those for the Chinese market both for return and volatility
transmissions. The daily, day and night returns for India's Sensex index are positively and significantly affected by the latest US
returns while the volatility of Indian returns are negatively influenced by the latest US returns. Table 4 shows that the latest Indian
daytime return also exerts a negative and significant effect on the Indian overnight returns volatility and the one-day lag return
shows a negative effect on the daily volatility. As in the case of Chinese returns, the overnight Indian returns are not only influenced
by its own daytime returns (local news) but they also react significantly to the latest US daytime return (global news) and to the latest
Chinese daytime returns (regional news).
The positive and significant coefficient of the squared US daytime returns in the Indian volatility equation suggests that, just like
for the Chinese stock market, the US market's returns influence the Indian stock market by affecting the Indian mean returns as well
as the Indian return volatility. This result underscores the importance of allowing the US market shock (global shock) to enter the
Indian and Chinese stock markets through both the mean return and volatility equations. The positive and significant GARCH
coefficient for the Indian volatility equation suggests that GARCH process may adequately capture the volatility features of Indian
overnight returns. The results under mean transmission and volatility transmission models in Tables 5 and 6 respectively show the
similar relationships between Indian and Chinese markets.
The results for the Brazilian stock market in Table 3 indicate that, just like for the Chinese and Indian markets, the latest US
stock market's daytime returns exert a significant influence on the overnight returns of Brazilian stock market. The coefficients are
negative and significant under daily and day returns while it is negative and significant under overnight returns. In Table 4, the effect
of US returns on Brazilian market both for returns and volatility is significant, but the signs for the volatility coefficients are opposite
to the ones found under Table 3. The other important force that moves the Brazilian overnight return is Brazil's own daytime returns
that show a significant and negative effect on the daily and day returns while positive and significant effect on the overnight returns.
It is worth noting that US stock returns influence the Brazilian stock market not only by affecting its overnight mean returns but also
by affecting the volatility of its overnight returns as shown by the positive and significance coefficient of squared US daytime returns
in Brazil's volatility equation. We also observe the similar effects both under mean and volatility transmission models presented in
Tables 5 and 6 respectively.
The coefficients for the ARCH and GARCH effects in Brazil's volatility equation are significant which may point to the
appropriateness of modeling Brazilian stock return volatility using the GARCH process. Since the Brazilian stock market has a large
block of overlapping trading hours with the US market, it may seem plausible to relate the Brazilian daytime return at time t (rather
than its overnight return) with the US daytime return at time t. However, this contemporaneous daytime return relation between the
Brazilian and US markets was weaker in our empirical estimation (not reported here) than the relation between the Brazilian
overnight returns and US daytime returns shown in Table 3.
Table 3 shows that, the latest US daytime returns also have a negative and significant effect on the Russian daily, day and
overnight returns and negative effect on South African daily returns while positive effect on day and overnight returns. However, the
US daytime returns affect the Russian overnight returns indirectly through its effect on the Russian return volatility as shown by the
positive and significant coefficient of US daytime returns in the Russian volatility equation as presented in Table 4. In addition, the
latest (one-day lagged) Russian daytime returns also exert a significant and negative effect on the Russian overnight returns. The
GARCH process appears to adequately capture the volatility properties of the Russian overnight returns as displayed by the positive
and significant ARCH and GARCH coefficients for the Russian volatility equation. The Chi-Square test suggests that the null
hypothesis of normally distributed residuals for the Russian overnight returns cannot be rejected.
In addition, the results of Tables 3 and 4 also suggest that the latest US daytime returns have significant spillover effects on the
overnight returns of Brazil, Russia, China, and India (BRICS). These BRICS markets open after the closing of US stock market,
except for Brazil which has overlapping trading hours with US, and hence the latest US daytime returns are known to traders prior to
the opening of the BRICS markets. These spillover effects from the US market to the BRICS markets occur through the mean stock
return process (except for Russia) as well as through the volatility process of the BRICS stock markets.

6.2. Structural break test results

We also test the sample data set for any structural break(s) that may point to the limitation and weakness in our results. In order
identify any structural breaks, following Tamakoshi and Hamori (2014a, 2014b), we employ Perron and Bai (1998, 2003) multiple
structural breaks test.3 We have tested for five breaks with a 15% trimming in the data.4 We consider a battery of tests in deciding on
the number of structural break changes. We use fixed break test, test for existence of a current break conditional on the previous
break, sequential break test, Modified Schwarz Information Criterion (LWZ) and Bayesian Information Criterion (BIC). A break is
considered as an actual break if it shows up in at least three of the five test procedures.
Panel A of Table 7 reports SupF(k) or fixed number of break. None of the BRICS return series shows any significant break under

3
The test is run in MATLAB (version R12b) using the code developed by Yohei Yamamoto (June 2012) and obtained from Professor Perron's website: http://
people.bu.edu/perron/.
4
We have 3667 return days. 15% trimming or 550 [=round (0.15*36670)] return-days are used in one segment to test any structural break in that segment. For
detail process of the tests, see Perron and Bai (2003).

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Table 7
Empirical Results of the Perron and Bai (1998, 2003) Test.

Panel A: SupF tests against a fixed number of breaks

SupFT(1): SupFT(2): SupFT(3): SupFT(4): SupFT(5):

Brazil 2.6417 3.0915 2.8660 2.1222 2.1632

Russia 4.3489 3.0458 2.0857 2.2014 2.1650
India 4.5192 5.7669 4.3990 3.7276 2.5276
China 6.7472 12.0279 10.3387 7.7691 6.1960
S. Africa 1.8221 1.3608 2.8733 2.2861 1.8954

Panel B: SupF(k+1|k) tests using global optimizers under the null

SupFT(2|1): SupFT(3|2): SupFT(4|3): SupFT(5|4):
Brazil 2.2333 1.1349 0.4533 N/A
Russia 4.0649 0.6723 2.3585 N/A
India 4.6475 1.2406 1.3353 N/A
China 18.3941* 6.8254 1.8988 N/A
S. Africa 3.0835 3.0759 1.3165 N/A

Panel C: Other Tests

Sequential LWZ BIC
Brazil 0 break 0 break 0 break
Russia 0 break 0 break 0 break
India 0 break 0 break 0 break
China 0 break 0 break 0 break
S. Africa 0 break 0 break 0 break

*
Significant at 1% level.

Table 8
Critical values (Perron and Bai, 2003).

Panel A: Critical Values for SupF (k) tests K=1 K=2 K=3 K=4 K=5

The critical values at the 10% level are (for k=1–5): 7.04 6.28 5.21 4.41 3.47
The critical values at the 5% level are (for k=1–5): 8.58 7.22 5.96 4.99 3.91
The critical values at the 2.5% level are (for k=1–5): 10.18 8.14 6.72 5.51 4.34
The critical values at the 1% level are (for k=1–5): 12.29 9.36 7.6 6.19 4.91

Panel B: Critical Values for SupF(k+1|k) tests

The critical values of supF(l+1|l) at the 10% level are (for i=1–5): 7.04 8.51 9.41 10 10.6
The critical values of supF(l+1|l) at the 5% level are (for i=1–5): 8.58 10.1 11.1 11.8 12.3
The critical values of supF(l+1|l) at the 2.5% level are (for i=1–5): 10.18 11.9 12.7 13.4 13.9
The critical values of supF(l+1|l) at the 1% level are (for i=1–5): 12.29 13.9 14.8 15.3 15.8

this test. These values are compared against the critical values produced by Bai and Perron and reported in Table 8. Panel B reports
the existence of a current break conditional on a previous break. The results are almost similar as found in Panel A except in case of
China. The Chinese return shows existence of two breaks (the reported value is significant at 1% level). The critical value from Perron
and Bai (2003) is also presented in Table 8 below. Panel C reports rest of the three tests. Under any of the test, no country in BRICS
shows existence of any break.
In summarizing the structural break test results, we could not conclusively find existence of any break in any of the BRICS’ return
series. The finding is not surprising because if we closely look at the plot (Fig. 1) of return series of BRICS markets (along with US
return), we can see that almost all index returns of all markets are bounded by +/−10%. None of the return series shows any negative
or positive trend. However, there is only one example of a concentrated volatility in the last quarter of 2008, although considering
the longer time horizon of sample (January 1999 to December 2012) the volatility has leveled. This evidence assures us that there is
no significant structural break in our data set that would require us to run additional test to account for those.

7. Summary and conclusions

This research paper investigates the spillover effects between the US stock market and the emerging stock markets of Brazil,
Russia, India, China and South Africa (BRICS) for the period of January 1999 to December 2012. The summary statistics reveals
that South Africa is an interesting market for potential US investors for higher risk-return trade-off compared to US stock markets.
Brazil and India also present a better opportunity compared to other emerging markets considered in this research. We use a variant
of the aggregate shock model under the GARCH framework and allow for both the mean return and volatility spillover effects from
the US market to the BRICS markets. We follow the chronological order of trading among the six markets and use the overnight and

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Distribution of Returns of BRICS and US

.3
.2
.1
Return
0
-.1
-.2

1/1/1998 1/1/2000 1/1/2002 1/1/2004 1/1/2006 1/1/2008 1/1/2010 1/1/2012

Date

US BR
RU IN
CH SA

Fig. 1. Index Returns of US and BRICS.

daytime returns in analyzing the transmission of information between the US and BRICS equity markets.
The results of this study suggest that the US stock market has significant mean return and volatility spillover effects on the BRICS
stock markets. In addition, the Chinese stock market exerts mean spillover effects on the Indian stock market and the mean spillover
effects from the Indian market to the Chinese market are equally strong. Further, the overnight returns in the BRICS markets are
significantly influenced by their own latest daytime returns. Our results contribute to the extant spillover literature in demonstrating
that the mean and volatility spillover effects exist not only from the US market to well-developed equity markets of Europe and East
Asia as shown in previous studies, but they also exist from the US market to emerging BRICS equity markets.
Our results show that the restricted volatility transmission model that allows only volatility spillover effects may not fully capture
the spillover effects between the US and BRICS stock markets. Similarly, the use of close-to-close returns may lead to misleading
conclusions about the information transmission between the US and BRICS stock markets.
BRICS offers investment opportunity in four continents, namely, Africa, South America, Asia, and Europe. The results in this
paper show that US market affects all BRICS markets in four continents. An interesting future research would be to experiment
portfolio diversification that focuses on investments in South Africa as opposed to the rest of the BRICS markets as it offers the
highest risk-return trade-off. Secondly, to diversify portfolio and to capture growth opportunities in Asia, one may experiment
whether considering India over China offers potentially higher risk adjusted returns. Based on the results in this paper, it may be
argued that investors in the USA may find South Africa and India more attractive compared to investing in small cap stocks in their
own country and other BRICS countries.

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