Emerging stock market reactions to shocks during various crisis periods

Abstract

This study investigates granger causal linkages among six Asian emerging stock markets and the US market over the period 2002–2020, taking into account several crisis periods. The pairwise Granger causality tests for investigating the short-run causality show significant bi- and uni-directional causal relationships in those markets and evidence that they have become more internationally integrated after every crisis period. An exception is Bangladesh with almost no significant short-term causal linkages with other markets. For understanding, how the financial linkages amplify volatility spillover effects, we apply the GARCH-M model and find that volatility and return spillovers act very inversely over time. However, market interface is weak before the crisis periods and becomes very strong during the financial crisis and US-China economic policy uncertainty periods. The US market plays a dominant role during the financial crisis and COVID-19 periods. Further analysis using the VAR model shows that a large proportion of the forecast variance of the Asian emerging stock markets is affected by the S&P 500 and that market shock starts to rise notably from the 1 to 10 period. The overall findings could provide important policy implications in the six countries under study regarding hedging, trading strategies, and financial market regulation.

Macroeconomic Variables, Global Stock, and Financial Sector Stock Indices in Indonesia

“…For example, a study found that the Thai SET financial sector stock index has a significant influence on Islamic share prices in the JII. Bhowmik et al (2022) added that global economic conditions and investor sentiment can also affect the SET and JII indices. For example, a study on the reaction of emerging stock markets to shocks during various crisis periods found that financial crises have a negative impact on market volatility.…”