Financial Crises and Structural Breaks in Autocorrelation on the Bric's Stock Markets

Abstract

The phenomenon of positive autocorrelation in daily stock index returns is often viewed as a consequence of stable behavioural patterns of certain investor groups (see, e.g., Sentana & Wadhwani, 1992; Koutmos, 1997). However, such patterns may change due to extreme events, that is, financial crises, and thus affect the autocorrelation in returns. Emerging markets and especially BRIC countries have experienced severe crises in the last 20 years and are therefore a suitable object for studying this effect.

The focus of this chapter is on identifying substantial changes in the autocorrelation of BRIC markets' index returns after experiencing upheavals of the financial system. For this purpose, we look for structural breaks in the parameters of an ARMA–GARCH model with the standard endogenous search procedure.

Our approach yields no statistically significant evidence of the autocorrelation changes due to the crises. Only in India the decline in autocorrelation in 1998 seems to be economically relevant, but is not significant statistically. Significant shifts that we could identify were rather related to microstructural changes, such as abolishment of price change limits by China and the removal of a leading player in India's market in 1992. All in all our results suggest that even though extreme negative events on financial markets may induce changes in feedback trading strategies, their influence on autocorrelation is not pronounced enough. The impact of other factors, in the first place of regulatory changes, seems to be of larger relevance.

Citation

Smirnova, G., Saldakeeva, O. and Gelman, S. (2011), "Financial Crises and Structural Breaks in Autocorrelation on the Bric's Stock Markets", Batten, J.A. and Szilagyi, P.G. (Ed.) The Impact of the Global Financial Crisis on Emerging Financial Markets (Contemporary Studies in Economic and Financial Analysis, Vol. 93), Emerald Group Publishing Limited, Leeds, pp. 523-544. https://doi.org/10.1108/S1569-3759(2011)0000093019