Measuring contagion during COVID-19 through volatility spillovers of BRIC countries using diagonal BEKK approach

Purpose The outbreak of the coronavirus disease 2019 (COVID-19) pandemic is an unprecedented shock to the BRICS (Brazil, Russia, India, China, South Africa) economy and their financial markets have plummeted significantly due to it. This paper adds to the recent literature on contagion due to spillover by uniquely examining the presence of pairwise contagion or volatility transmissions in stock markets returns of India, Brazil, Russia, China and USA prior to and during COVID-19 pandemic period. Design/methodology/approach In this study, the generalised autoregressive conditional heteroskedasticity (GARCH) by Bollerslev (1986) under diagonal parameterization is used to estimate multivariate GARCH framework also known as BEKK (Baba EngleKraft and Kroner) model on stock market returns of BRIC nations and the US. Findings The empirical results show that the model captures the volatility spillovers and display statistical significance for own past mean and volatility with both short- and long-run persistence effects. Own volatility spillovers (Heatwave phenomenon) have been found to be highest for the US, China and Brazil compared to Russia and India. The coefficients indicate persistence of volatility for each country in terms of its own past errors. The highest and long-term spillover effect is found between US and Russia. The results recommend that Russia is least vulnerable to outside shocks. Finally after examining the pairwise results, it is suggested that the BRIC countries stock indices have exhibited volatility spillover due to the COVID-19 pandemic. Research limitations/implications The study may be extended to include other emerging market economies under a dynamic framework. Practical implications Researchers and policymakers may draw useful insights on cross-market interdependencies regarding the spillovers in BRIC countries' stock markets. It also helps design international portfolio diversification strategies and in constructing optimal portfolios during COVID and in a post-COVID world. Originality/value COVID-19 has been an improbable event in the history of the world which can have a large impact on the financial economies across the emerging countries. This event can be deemed to be informative enough to measure the co-movements of the equity markets amongst cross-country return series, which has not been investigated so far for BRIC nations.