Dynamic interdependence between US and Asian markets: an empirical study

Sowmya Dhanaraj (Department of Management Studies, IIT Madras, Mumbai, India)
Arun Kumar Gopalaswamy (Department of Management Studies, IIT Madras, Mumbai, India)
Suresh Babu M (Department of Humanities and Social Sciences, IIT Madras, Mumbai, India)

Journal of Financial Economic Policy

ISSN: 1757-6385

Publication date: 24 May 2013

Abstract

Purpose

The purpose of this paper is to examine the short‐term stock market interactions between US and six major Asian markets – China, India, Hong Kong, Singapore, South Korea and Taiwan. These six economies along with Japan and Australia have the largest stock exchanges in the Asia‐Pacific region. The importance of the US market to the Asian economies is the prime motivation for a quantitative assessment of its role in this region. The objective of this study is to measure the dynamic stock market interdependence of US and Asian newly industrialized economies (NIEs) (Hong Kong, Singapore, South Korea and Taiwan) and emerging market economies (EMEs) (China and India) post Asian crisis of 1997 and also to capture the market interactions during the sub‐prime crisis.

Design/methodology/approach

The study has employed Granger causality tests and generalized forecast error variance decomposition (FEVD) analysis to analyze the fluctuations in and the extent of short‐term interdependence between the US and Asian economies. VAR model was estimated to run the simulations for FEVD analysis.

Findings

The empirical results from FEVD analysis revealed the dominance of US stock market on Asian markets; the USA being a large economy of the world, an important trading partner and major supplier of capital to Asian region. Stock markets of Asia are not immune to the shocks originating in the USA although the effects of shocks vary considerably across markets. Further, an important implication is that major crisis events can influence the relationship among stock markets.

Originality/value

This is one of the first papers in the Asian context examining the interdependence with the US markets. Hence, even though most of the Asian economies went through liberalization, the macroeconomic and financial circumstances were very different before, after and during the process. This motivated the examination of the interactions between US and other Asian markets.

Keywords

Citation

Dhanaraj, S., Gopalaswamy, A. and Babu M, S. (2013), "Dynamic interdependence between US and Asian markets: an empirical study", Journal of Financial Economic Policy, Vol. 5 No. 2, pp. 220-237. https://doi.org/10.1108/17576381311329670

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Publisher

:

Emerald Group Publishing Limited

Copyright © 2013, Emerald Group Publishing Limited

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