The transmission of market shocks and bilateral linkages: Evidence from emerging economies

Faruk Balli, Hatice Balli, Rosmy Jean Louis and Tuan Kiet Vo

International Review of Financial Analysis, 2015, vol. 42, issue C, 349-357

Abstract: The linkage between emerging and developed economies spans beyond the usual trade in goods and services. Underlying trade is the flow of capital for foreign direct investment and for speculation in markets, which renders emerging economies vulnerable to shocks from the developed world. As such, equity return volatility in emerging markets is partly attributable to this dependence. To gauge the importance of bilateral economic and cultural factors in driving economic integration, we adopt a two-step process. First, we use Diebold and Yilmaz's spillover index methodology to extract spillover indices representative of the return volatility spillover effects of the United States, the developed portion of the Euro area, and Japan on financial markets in Asia, the Gulf Cooperation Council countries, Eastern and Central Europe, Africa, and Latin America. Second, we test whether these indices are governed by economic and cultural factors. Our results show that the spillover effects vary across markets and that a strong correlation exists with the volume of trade, security investment, common language, distance, and market capitalization.

Keywords: Bilateral trade; Equity market; GARCH; Market integration; Security investment; Spillover; Volatility (search for similar items in EconPapers)
JEL-codes: F21 F36 G12 G15 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (18)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:42:y:2015:i:c:p:349-357

DOI: 10.1016/j.irfa.2015.08.010

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