If you’ll ask any academic what the core success factor of the research paper is, what they will probably mention first is to find a gap in the literature, i.e. something that has not been explored before and requires further attention due to the high practical or theoretical significance. Current events and BREXIT contagion gave me a certain confidence in my intuitive skills to find these gaps in research. A few months ago I published a paper entitled “Stock market comovements around the Global Financial Crisis: Evidence from the UK, BRICS and MIST markets”. This paper had the most intense history of revision that I had so far, – 3 desk rejections, revise/resubmit and reject, revise/resubmit and finally acceptance! Bingo! What was the reason for this battle? Simple, the reviewers’ opinion: “Why is it important at all to explore contagion and diversification from the UK investors’ view point?” Nobody used to believe that such a country as the UK can ever become a source of major economic shock that will generate the spillover effect to other markets. But somehow I did, and now I have one of the premier studies considering contagion to BRICS and MIST from the UK point of view. Good for me though, and good for the journal that believed in my crazy research idea! Luck you’ll say, instinct I would answer.
In my previous blog I mentioned that BREXIT will have severe consequences for European markets, but rather limited impact on markets located in different geographical regions. Today I want to focus entirely on emerging economies, such as BRICS (Brazil, Russia, India, China and South Africa) and MIST (Mexico, Indonesia, South Korea and Turkey). These emerging economies demonstrated higher economic growth rate compared to the developed economies, increasing their share in the world GDP and foreign direct investments. Emerging countries were less affected by the economic crisis, and both BRICS and MIST countries demonstrated less depth of recession as developed countries, making those markets more attractive for investors.
The MIST nations are likely to exhibit higher growth over the next 20 – 30 years. MIST could be placed in the analytical category of ‘rising powers’ in the coming two decades, together with BRICS. The increasing political and economic influence of these countries attracts the attention of both practitioners and supervisory bodies, hence it is also worth mentioning that the major difference between BRICS and MIST grouping is the existence of inter-country policies and agreements. The BRICS countries nowadays operate as a strategic ‘alliance’ and, since 2009, have held annual summits to discuss economic cooperation between the member states. The acronym MIST has been established more recently, in 2011. Contrary to the BRICS grouping, MIST countries do not operate as a political and economic alliance. Mexico, Indonesia, South Korea and Turkey significantly improved their performance and have strengthened their position in the global economy, hence these markets have been grouped together by researchers.
Whether the BREXIT shock will transmit to BRICS and MIST countries? Referring to theory, it is important to understand that existence of strong interconnectedness between markets will not necessarily cause the contagion between them. The research results identify the contagion between UK-Brazil, UK-South Africa and UK-Mexico as these markets are susceptible to negative shocks occurring in the UK stock market, while UK-India, UK-Indonesia and UK-South Korea pairings demonstrate strong interconnectedness rather than contagion. Although the stock markets of the UK and China are co-integrated, asymmetric causality tests demonstrate that the Chinese stock market was not affected by positive or negative shocks transmitted from the UK market either before or after the identified past crisis shocks. Furthermore, the dynamic correlation between the UK and China is the lowest and most stable throughout the sample. These findings support the evidence that China is potentially less affected by negative consequences of BREXIT in the future. Alternatively, there is also an increase in causal linkages between the UK and Russia after the Global Financial Crisis, therefore it is likely that the Russian market can decline together with the UK. In a similar way, for the UK and Turkey pair, asymmetric causality tests show that the Turkish market is susceptible to negative shocks from the UK.
The impact of BREXIT on BRICS and MIST markets will definitely be a relevant topic in the near future, so mind the gap in literature.
For reference and research results please see the paper:
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