Assessing the interdependence of exchange rates, precious metals, and energy prices in the BRICS economies: Evidence from vine copulas approach

Abstract

This paper attempts to apply the vine copulas methodology to assess the interdependence among the exchange rate market, equity indices, precious metals and energy resources within the selected BRICS economies. Using the ARFIMA-GJR-GARCH model, the residuals of the daily returns from foreign exchange rates, precious metals, equity indices, and energy prices of the BRICS economies for the period from January 1, 2003, to August 2023 were filtered. The empirical findings reveal a persistence of shocks and an asymmetric response to positive and negative news. Elevated volatility was observed across equity, precious metals, and energy markets, indicating substantial risks that necessitate robust risk management strategies. The results illustrate the heightened sensitivity of BRICS economies to external shocks, such as the Global Financial Crisis and the COVID-19 pandemic, which have triggered market volatility across currencies, stock market returns, and energy prices. This study emphasises the crucial importance of diversification, given the strong co-movement among asset classes, particularly during periods of extreme market volatility. Furthermore, the vine copulas analysis reveals intricate co-movements between assets, contributing to enhanced portfolio management strategies. Assets such as oil and gold serve as effective hedges. At the same time, foreign exchange rates play a significant role in investment decisions, underscoring the necessity for meticulous risk assessment and diversification strategies. These findings emphasize the vulnerability of BRICS economies to external shocks and highlight the imperative of effective risk management and diversification in navigating these dynamic markets. • ARFIMA-GJR-GARCH and C/D-vine copulas capture BRICS multi-asset dependence • C-vine fits Brazil, Russia, China; D-vine suits India and South Africa • Silver is central node; lower-tail dependence links silver with BRICS assets. • Oil and gold hedge; weak tau pairs provide diversification • Asymmetric tail risks stress need for volatility-aware BRICS risk management