Are stock returns on the US used as an exogenous predictor to the Asian emerging equity markets

Abstract

By using a block recursive vector autoregression model and two new out-of-sample tests, this study has found that the US stock returns have predictive ability for the four Asian emerging equity markets. The estimates from weekly data suggest that returns on S&P500 positively predict stock returns of Asian emerging markets up to three weeks.

Notes

¹ These two tests are discussed in Rapach and Wohar (2006).

² In terms of market capitalization expressed in US dollars, these are the four largest Asian markets after the Japanese and Australian markets.

³ Using Bayesian information criteria, the identified VAR model suggests the lag order is 2.

⁴ Using weekly data, Cha and Oh (2000) reported that the 1% unexpected increase in US return rates caused Korean rates to oscillate from 0.7 to −1.27% in the period from 4 July 1997 to 18 September 1998.

⁵ The MSE-F statistic is not significant at the 7- and 11-week horizons.