International spillovers from US forward guidance to equity markets

We quantify the international spillovers of explicit Federal Open Market Committee (FOMC) policy rate guidance used as an unconventional monetary policy tool at the zero lower bound of the policy rate on international equity markets, considering equity indices of both advanced and emerging economies. We find that stimulatory explicit FOMC policy rate guidance announcements at the zero lower bound led to higher equity prices in a number of advanced and emerging economies. Moreover, we find that equity indices of economies with lower sovereign ratings rose by more, consistent with the risk-taking channel of monetary policy.     

Co-movement and spillovers: empirical evidence from BRIC equity markets

A higher degree of co-movement and spillover effects among different asset classes undermine portfolio diversification benefits. In this regard, the present study attempts to capture dynamic co-movement and return-volatility spillover effects among the most promising emerging equity markets, i.e. Brazil, Russia, India and China in a multivariate framework by employing VAR-ABEKK and VAR-DCC-AGARCH (1,1) models. To further comprehend the behaviour of the correlation coefficients during the global financial crisis period (2007–2009), heat map and Markov regime switching model (two regimes with a switch at ‘mean’ level only) have been used. The results report that the BRIC equity markets do not share a common stochastic trend in the long run. There is strong evidence of market shocks to volatility, volatility to volatility and negative shocks to volatility spillover effects among the BRIC markets. Overall, the BRIC markets are partially integrated with each other, thereby making them stronger investment candidates.     

A comparison of variance ratio tests of random walk: A case of Asian emerging stock markets

This study re-examines the random walk hypothesis for eight emerging equity markets in Asia: Hong Kong, Indonesia, Korea, Malaysia, the Philippines, Singapore, Taiwan, and Thailand. The hypothesis is tested with two new variance ratio tests–Wright's rank and sign and Whang–Kim subsampling tests–as well as the conventional Lo–MacKinlay and Chow–Denning tests. We found that (i) the stock prices of the eight Asian countries do not follow random walk with the possible exceptions of Taiwan and Korea and (ii) the accelerated opening of the eight stock markets to foreign investors following the Asian financial crisis in 1997 has not significantly altered the mean-reversion patterns of stock price vis-à-vis relative market efficiency. Our study affirms that Wright's and Whang–Kim's tests yield far less ambiguous results as compared to Lo–MacKinlay and Chow–Denning tests.     

Financial integration and the ASEAN-5 equity markets

The existence of long-run relationships among the ASEAN-5 equity markets is empirically investigated. This study utilized weekly data spanning January 1988 to August 1999. The results of Granger noncausality test due to Toda and Yamamoto (Journal of Econometrics,66, 225–50, 1995) reveal that the Singapore equity market was not affected by other markets except by the Philippines in the long run. This result shows that there exist opportunities for beneficial international portfolio diversification within the context of the Asean-5 equity markets.     

The transmission from equity markets to commodity markets in crises periods

This article investigates the transmission from equity markets to commodity markets during two major financial crises, namely the Subprime Mortgage and the Sovereign Debt Crises. We perform an analysis on sub-stages from 3 January 2003 to 31 October 2013 to capture the price behaviour of both equity and commodity markets. Two financial crises indicators, VIX and CDS, are used to represent fear of a crisis. We find that correlations between commodity and equity markets are time-varying and highly volatile during a financial crisis. While sharing some common features, commodities cannot be considered a homogeneous asset class. Segmentation characteristics of commodity markets disappear in times of financial crises, reducing their substitutability as an investment portfolio for asset diversification purposes. Through our test for Granger causality, we find the existence of transmission during a financial crisis. Volatility spillover effect also plays a major role as transmission mechanisms. After the collapse of Lehman Brothers, commodities decoupled from the VIX rather soon, and there is an increase in correlation with the CDS. In addition, we find the decoupling effect of most commodities show insignificant correlations with the Dow Jones, VIX and CDS after the Greek debt restructuring.     

Dynamic correlation and equicorrelation analysis of global financial turmoil: evidence from emerging East Asian stock markets

This study investigates the dynamic conditional correlations (DCCs) between eight emerging East Asian stock markets and the US stock market and analyses the dynamic equicorrelation among these nine stock markets. We find a significant increase in the conditional correlations and equicorrelation in the first phase of the global financial crisis. We refer to this finding as contagion from the US stock market to the emerging East Asian markets. We also find an additional significant process of increasing correlations and equicorrelation (herding) in the second phase of the global financial crisis. Further, we employ two new models, namely DCCX-MGARCH (a DCC Multivariate GARCH model with exogenous variables) and DECOX-MGARCH (a dynamic equicorrelation multivariate GARCH model with exogenous variables), to identify the channels of contagion. We find that an increase in the VIX Index increases the conditional correlations and equicorrelation, while increases in TED spreads decrease the conditional correlations of six emerging East Asian countries with the USA. We compare the accuracy of the conditional correlation estimates of the DCC and DCCX models (or DECO and DECOX models) by constructing a loss function. We find that the DCCX (DECOX) model provides more accurate conditional correlation estimates than the DCC (DECO) model by extracting additional information from exogenous variables.     

Financial Integration in Emerging Asia: Challenges and Prospects

Using both quantity‐ and price‐based measures of financial integration, the paper shows an increasing degree of financial openness and integration in emerging Asia. Assessing the impact of a regional shock relative to a global shock on local equity and bond markets, the findings suggest that the region's equity markets are integrated more globally than regionally, although the degrees of both regional and global integration have increased significantly since the 1997/1998 Asian financial crisis. However, emerging Asia's local currency bond markets remain generally segmented, being neither regionally nor globally integrated. There are potential benefits from increased regional integration of financial markets. Financial integration at the regional level allows for the region's economies to benefit from allocation efficiency and risk diversification. Policymakers in the region must strike the right balance between maximizing the net benefits from regional and global financial openness, and minimizing the potential costs of financial contagion and crisis.     

The evolution of debt and equity markets in economic development

Summary. As noted by Gurley and Shaw, there is a typical pattern of economic development in which the evolution of the financial system is an essential aspect of the growth process. We focus on one component of this evolution: the increasing importance of equity markets as an economy grows. We develop a growth model where capital accumulation is financed externally through a combination of debt and equity. We illustrate why equity market activity might grow – often very rapidly – as an economy develops. We also illustrate why access to equity markets may not be needed in the early stages of economic development. Received: December 30, 1997; revised version: May 26, 1998     

Volatility spillovers and determinants of contagion: Exchange rate and equity markets during crises

We study the hourly volatility spillover between the equity markets of New York (DJI), London (FTSE 100) and Tokyo (N225) and their exchange rates (USD, EUR, GBP and JPY) for the period of 2001 through 2013 covering the non-crises period, the global financial crisis and the euro debt crisis. First, we find a general increase in spillover between the equity and exchange rate markets during the crisis periods. Second, pure contagion (attributable to irrational investors’ behavior) and fundamental contagion (measured by macroeconomic fundamentals) explains the increased spillover between the FTSE 100, N225 to the DJI during the global financial crisis and from the exchange rate markets to the DJI during the euro debt crisis.     

Volatility transmission between Islamic and conventional equity markets: evidence from causality-in-variance test

This study examines whether a volatility/risk transmission exists between the Dow Jones Islamic stock and three conventional stock markets for the United States, Europe and Asia during the pre- and the in- and post-2008 crisis periods. It also explores the volatility spillover dynamics between those markets and US Monetary policy, oil prices, global financial risk and uncertainty factors. The recently developed Hafner and Herwartz (2006)’s causality-in-variance test provides evidence of risk transfers between these seemingly different equity markets, indicating a contagion between them during the full sample and the subperiods. The volatility structure of these markets is dominated by short-run volatility in the first period and by high long-run volatility in the second period. The volatility impulse response analysis indicates a similar volatility transmission pattern although it is characterized by a more volatile and short-lived structure in the second period. It also appears that the Islamic equity market responds to shocks from the risk factors and not from the oil price and the US economic policy uncertainty index during both periods.     

Return predictability in emerging equity market sectors

This article investigates the predictive power of technical trading rules in the emerging equity market sector portfolios and finds that trading strategies based on technical indicators significantly outperform the buy-and-hold benchmark. Combination of data snooping bias, data measurement errors in the form of non-synchronicity bias and fluctuations in currency exchange rates is unable to explain the observed outperformance. The introduction of transaction costs tempers the results but technical analysis still possesses significant predictive power for a number of sectors. The performance of technical analysis in the emerging equity market sectors does not conform to historical trends observed in the developed equity markets as well as in the emerging equity markets when broadly diversified portfolios are considered, where predictive power of technical trading rules has been shown to decline over time.     

Regional spillovers across transitioning emerging and frontier equity markets: A multi-time scale wavelet analysis

The episodic wave of crises experienced across the global financial markets over the past two decades has raised questions surrounding the vulnerability of transitioning emerging and frontier equity markets to exogenous shocks. These markets, by design, have lacked the institutional or financial architecture supporting their capital base compared to more established markets. We make the initial attempt to examine four such stock markets (Saudi Arabia, UAE, South Africa and Israel). We perform multi-timescale analysis using wavelet-based time and frequency decompositions in order to investigate (i) whether the shocks transmitted were pure contagion or fundamental-based and (ii) also whether the dynamic evolution of stock market integration was mainly short-term or long-term. We find that prior to the 2008/09 US subprime crisis, the shocks generated pure contagion in contrast to the subprime crisis that reveals evidence supportive of fundamental-based contagion. Further, when exploring the dynamics of market integration, we find that integration strengthens over time as opposed to any immediate short-term outcome. This supports policies engendered to promote stock market resiliency and stability.     

Effects of capital flow on the equity and housing markets in Hong Kong

The revival of strong capital flows to emerging economies following the global financial crisis in 2008–2009 has rekindled the debate on effects of excessive capital inflows. We study the effects of official and illicit capital flows on Hong Kong, which is a small and open economy with minimal restrictions on cross‐border fund movements. It is found that the official and illicit capital flow measures display a low level of comovement and exhibit differential effects on Hong Kong's equity and residential housing markets. The results highlight the complexity of managing capital flows, and the relevance of sector‐specific capital management policies.     

Financial cycles in asset markets and regions

This paper provides a comprehensive analysis of financial cycles in asset markets and regions. Using a large sample of 38 advanced and emerging economies to enable a comparative assessment, the analysis conforms with the prevailing literature pertaining to the characterization of financial cycles in advanced economies, but finds that equity market cycles in emerging market economies (EMEs) in Asia, Latin America, and Eastern Europe may be a more useful gauge of the financial cycle compared to cycles in credit and property markets. Similar to more advanced economies, it is found that financial and business cycles in emerging economies are synchronized, albeit partially and with some cross-country heterogeneity. This underscores the importance for policy makers to be vigilant of interlinkages between real and financial sectors, pointing toward a need for carefully designed macroprudential policies. Finally, it is found that financial cycles in emerging markets remain vulnerable to global risk aversion in financial markets and spillovers from the US, thereby reinforcing the importance of continuing to strengthen domestic macroeconomic fundamentals, and develop further local financial sectors through targeted structural reforms.     

The relationship between South Asian stock returns and macroeconomic variables

This article investigates whether economic variables have explanatory power for share returns in South Asian stock markets. In particular, using data for four South Asian emerging stock markets over the period 1998–2012, the article examines the influence of a selection of local, regional and global economic variables in explaining equity returns; most previous studies that have examined this issue have tended to focus on only local and/or global factors. Important factors are identified by distilling the macroeconomic variables into principal components. Economic activities, real interest rates, real exchange rates and the trade balance represent local factors. Regional factors are represented by interregional trade and regional economic activity while global factors are represented by world financial asset returns and world economic activity. The vector autoregression results suggest that the South Asian markets examined are not efficient. Both local and regional factors can directly and indirectly explain Bangladeshi, Pakistani and Sri Lankan stock returns while the lagged returns of the Pakistani stock market and world economic activity can explain Indian stock returns.     

Islamic financial markets and global crises: Contagion or decoupling?

This paper investigates the contagion effects of the global financial crisis (GFC) and Eurozone sovereign debt crisis (ESDC) on Islamic equity and bond markets. Using a sample of Islamic stock indices from various developed and emerging markets and the global Islamic stock and bond (sukuk) indices, we explore asymmetric conditional correlation dynamics across stable and crisis periods and across the two crises. The results fail to provide strong contagion evidence between conventional and Islamic equity and bond indices, supporting the decoupling hypothesis of the Islamic securities. Our findings imply that Islamic equities and bonds may provide a cushion against risk and instability, particularly in periods of turmoil. The small number of contagion cases mostly relates to the ESDC and developed Islamic stock indices. The findings also show that the Islamic emerging stock indices in the BRICS provide the most effective international portfolio diversification benefits compared to the Islamic developed indices.     

Structural change and international stock market interdependence: Evidence from Asian emerging markets

This study investigates the evolving pattern of the interdependence among selected Asian emerging markets and three major stock markets (Japan, UK and US). Using rolling cointegration methods and the recently developed algorithms of inductive causation, we found that time-varying cointegration relationships exist among these stock markets. The results indicate that the wave of financial liberalization policies in the early 1990s led to a significant increase in market linkages which was later weakened during the 1997 Asian financial crisis. Furthermore, the data indicate that Japan and the US have the greatest influence on the emerging markets while the influence of Singapore and Thailand has increased since the Asian financial crisis.     

Stock and credit market expansion and economic development in emerging markets: further evidence utilizing cointegration analysis

This paper empirically investigates the relationship between equity and credit market development and economic growth, in a sample of five very important ‘emerging’ markets. In particular, employing a multivariate time-series methodology to test for long-run trends and causality between variables that proxy for stock market development, credit market development and economic development. The results seem to suggest that equity markets have a role to play only in relatively liberalized economies, like Chile and Mexico. In financially repressed economies, like India, the equity market does not affect real sector growth. Furthermore, the banking crises in the 1980s and 1990s in Chile and Mexico resulted in a negative relation between economic growth and the credit market. In South Korea, equity and credit markets both affect economic growth, but not vice versa. In countries where the nature of the stock market has been speculative, like Taiwan, a negative relationship is detected between equity market development and economic development.     

Has the Asian crisis changed the role of foreign investors in emerging equity markets: Taiwan's experience

This paper examines whether the 1997 Asian crisis changed the trading behaviors of foreign investors and of local institutional investors in Taiwan's stock market. There is little evidence that the Asian crisis changed the relationship between equity flows and market returns in Taiwan's stock market but there is evidence that volatility effects and volatility spillover were strengthened after the crisis. The general findings are (i) feedback trading arguments are much stronger than information arguments; (ii) relationships between returns and sale changes are the weakest but volatility effects using sale measures are the strongest; (iii) strong volatility effects and volatility spillover are found after the crisis; and (iv) the results for domestic institutional investors are slightly stronger than those for foreign investors.     

Oil shocks,US economic uncertainty,and emerging stock markets

This paper investigates the impacts of oil price shocks and US economic uncertainty on emerging equity markets within a structural VAR model. I find that both precautionary oil demand and US economic uncertainty shocks have significant negative effects on emerging stock returns, whereas aggregate demand shocks cause a sustained rise of the returns. In particular, the direct effects of oil shocks on emerging stock returns are amplified by the endogenous response of US economic uncertainty. Variance decomposition analysis shows that oil market fundamentals and US economic uncertainty are an important determinant of emerging equity returns, accounting for 35% and 24% of their long-term variations, respectively. The heterogeneous impacts of structural shocks on individual emerging markets, however, suggest that a well-diversified portfolio can be obtainable.