Measuring Spillovers between the US and Emerging Markets

Tom Pak Wing FongAuthor-Workplace-Name: Research Department, Hong Kong Monetary Authority, Ka Fai LiAuthor-Workplace-Name: Research Department, Hong Kong Monetary Authority and Angela Kin Wan Sze
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Angela Kin Wan Sze: Research Department, Hong Kong Monetary Authority

No 82016, Working Papers from Hong Kong Institute for Monetary Research

Abstract: This paper evaluates the financial spillovers between the US and emerging market economies (EMEs) using the methodology advocated by Diebold and Yilmaz (2009). Based on (i) cross-asset returns of sovereign bond, equity, and foreign exchange, and (ii) 27 individual long-term sovereign bond yields, we consistently find that bond market spillovers between the US and EMEs have strengthened following the tapering tantrum in May 2013. This implies that a US monetary tightening would have potent spillovers on other economies, and especially on financial markets¡¯ performance outside the US particularly in EMEs. The repercussions from EMEs to US are also significant and would generate undue pressure on the US affecting subsequent policy actions. The two-way interactions between the US and EMEs can pose challenges for central banks in formulating policies independently.

Keywords: Spillovers; contagion; systemic risk; financial integration; vector autoregression; emerging markets; monetary policy normalisation; sovereign bond markets. (search for similar items in EconPapers)
JEL-codes: C32 F34 G15 H63 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2016-08
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