Dynamic Behavior of Country Risk in the BRICS Countries: From the Perspective of Time-varying Correlation

Country risk is a quite important factor for international investment. Many institutions and researchers try to assess country risk by using numerous indicators and various evaluation models. This paper investigates the dynamic behavior of country risk in order to offer more detailed information of country risk to investors. First, country beta is taken as the proxy of country risk. Second, dynamic conditional correlation (DCC) model is used to calculate the time-varying beta. Considering the fast development of Brazil, Russia, India, China and South Africa (BRICS), these five BRICS countries are selected as empirical sample, and the results show that the five countries index return dynamic volatilities fluctuate strongly in late 2008 which can be ascribed to the finance crisis. Besides, the dynamic correlation coefficients of BRICS with the world stock index yields show a rising trend and their correlation coefficients are positive, especially, after the finance crisis in 2008, BRICS correlation coefficients against the world are getting closer, this means that BRICS are playing a more important role in the world in some degree. Our research also finds that BRICS countries betas are unstable and above 1 usually.