What global economic factors drive emerging Asian stock market returns? Evidence from a dynamic model averaging approach

Due to marketization and globalization, emerging Asian stock markets are influenced by numerous global factors, such as the business cycle, uncertainty in economic and monetary policy, financial and commodity markets, and investor sentiment. This study explores the global economic factors that significantly impact on emerging Asian stock market returns, and especially those that were important during the financial crisis, by applying a dynamic model averaging (DMA) approach. The advantage of this approach is that it takes account of the fact that forecasting models and their coefficients can change over time. However, unlike existing DMA studies that consider only forecasted asset prices, we analyse both the in-sample relationship and out-of-sample predictability of the impact of global factors on stock returns, according to the sensitivity of stock markets. In terms of in-sample relationship, we find that developed stock and exchange rate markets show a strong relationship with emerging Asian stock markets due to financial market integration. In contrast, the forecasting power of economic fundamentals is highest out-of-sample because stock markets reflect real economic activity.