Volatility spillovers between exchange rates and stock markets in the BRICS economies: new evidence from COVID-19 and Russian Ukrainian war

Since 2020, various natural (COVID-19 pandemic) and manmade crisis (Russia-Ukraine invasion) have significantly impacted financial markets, triggering information transmission or spillover effects between assets and markets. Stock markets being the barometer of any economy is impacted by several macroeconomic factors like inflation, interest rates, war, natural disasters, recession and exchanges rates to name a few. BRICS, a group of emerging countries accounting for 33% of global GDP,42% of the global population, and 17% of global commerce is an important pillar of the world order. This study focuses on the BRICS economies, investigating the dynamic correlation and volatility spillovers between exchange rates and stock markets during two critical global events: the COVID-19 pandemic and the Russian-Ukrainian war. Utilizing the DCC-EGARCH methodology and analysing daily data from October 29, 2018, to August 31, 2022, the research examines time-varying correlations, categorizing the data into pre-COVID, during COVID, pre-war, and during war sub-periods. The study aims to discern changes in the exchange rates-stock market return nexus, before and during these crises and explores potential variations in this relationship between natural events (such as COVID-19) and man-made outbreaks (Russia-Ukraine invasion). The findings indicate that COVID-19 and Russia-Ukraine war has minimal impact on the relationship between stock markets and exchange rates in all BRICS countries except Brazil. Notably, there are spillovers from exchange rates to the stock market in the long run only. Consequently, the study suggests that investors may find diversification opportunities in the short run during crises, as these events may not significantly affect spillovers in these markets. The notable impact on the relationship between stock markets and exchange rates in BRICS during the crises underscores the importance of tailored policy responses in these countries. Given the interconnectedness revealed in long-term spillovers, global economic policymakers may benefit from enhanced coordination to mitigate the impact of economic crises on exchange rates and stock markets.