Market Fear and Emerging Market Returns: Analyzing the Impacts of VIX and Dollar Index

Abbas Valadkhani and Barry O’Mahony ()
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Abbas Valadkhani: Department of Accounting, Economics and Finance, Swinburne University of Technology, Hawthorn Campus, John Street, Hawthorn 3122, Australia†College of Business, Abu Dhabi University, Zayed City, Abu Dhabi, United Arab Emirates
Barry O’Mahony: ��College of Business, Abu Dhabi University, Zayed City, Abu Dhabi, United Arab Emirates

Annals of Financial Economics (AFE), 2024, vol. 19, issue 03, 1-22

Abstract: This paper examines how changes in two measures of market fear in the US — the VIX (volatility) index and the dollar index — affect equity returns in emerging markets from March 11, 2005, to May 5, 2023. We analyze daily data from two exchange-traded funds (ETFs) representing major emerging countries from different continents, which have not been studied before. We observe that during times of global uncertainty, investors often turn to the US dollar as a safe haven. This shift leads to capital leaving emerging markets, resulting in lower stock returns and increased market volatility. Our findings show that a higher VIX index significantly and asymmetrically reduces average returns in emerging markets, while a lower VIX index has a comparatively smaller positive impact. In contrast, the influence of changes in the US dollar index on emerging markets is consistent and symmetric, regardless of which ETF is considered. Moreover, our results indicate that considering both indices together provides a more accurate prediction of equity returns in emerging markets.

Keywords: Market fear; uncertainty; emerging countries; VIX; dollar index (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1142/S2010495224500155

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