Financial Stress Transmission from the United States to BRIC Markets: A Time-Varying Markov-Switching Approach (2019–2024)

The transmission of US financial stress to emerging markets is a key issue in a global environment characterized by the COVID-19 pandemic, monetary tightening, geopolitical tensions, and disruptions in commodity markets. This study aims to analyze the non-linear transmission of US financial stress to the stock markets of the BRIC countries (Brazil, Russia, India and China) and to examine whether this stress increases the probability of regime shifts in the volatility of these markets over the period 2019–2024. The analysis covers the four BRIC economies and uses daily data covering the period from 1 January 2019 to 31 July 2024. Using a Time-Varying Transition Probability Markov-Switching (TVTP-MS) model, we examine whether US financial stress, measured through global equity volatility, credit-risk indicators, dollar-liquidity conditions, and commodity-price movements, increases the likelihood of regime shifts in BRIC market volatility. The empirical results show that US equity volatility and USD-liquidity shocks constitute the dominant global transmission channels. The commodity-price channel is particularly strong for Brazil and Russia, while India and China exhibit greater resilience supported by domestic liquidity buffers and more stable sovereign-risk profiles. The filtered probabilities highlight three major episodes of synchronized bear-regime transitions across BRIC markets: the onset of COVID-19 (2020), the Fed’s aggressive tightening combined with the war in Ukraine (2022), and the US banking-stress episode (2023). Theoretically, this study contributes to the understanding of the time-varying nature of financial stress transmission. Empirically, the findings for the BRIC stock markets underscore the significant role of global volatility and USD liquidity conditions in driving stock market regime shifts.