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Interrelations of U.S. market fears and emerging markets returns: Global evidence

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  • Ghulam Sarwar
  • Walayet Khan

Abstract

We investigate the interrelations between U.S. stock market uncertainty (VIX) and equity returns in several emerging markets (EMs) in an integrated multivariate system that allows the interactions through the first and second moments of VIX and return processes. Our VARMAX‐CCC‐QGARCH model finds significant interactions in the covariance terms of VIX and EM returns, which facilitate risk transmission. Changes in VIX negatively affect EM returns, which also significantly affect VIX changes. We find that VIX changes and EM returns collectively have predictive ability for each other. Further, VIX shocks contribute 22–42% to the prediction error of EM returns. Our results underscore the importance of capturing interactions between VIX changes and EM returns through their variance–covariance matrix and have important implications for global diversification, flight‐to‐safety choices, and hedging the cross‐market risks.

Suggested Citation

  • Ghulam Sarwar & Walayet Khan, 2019. "Interrelations of U.S. market fears and emerging markets returns: Global evidence," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 24(1), pages 527-539, January.
    • Handle: RePEc:wly:ijfiec:v:24:y:2019:i:1:p:527-539
    DOI: 10.1002/ijfe.1677
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    Cited by:

    1. Juan Andres Rodriguez-Nieto & Andre V. Mollick, 2021. "The US financial crisis, market volatility, credit risk and stock returns in the Americas," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 35(2), pages 225-254, June.
    2. Emrah Koçak & Umit Bulut & Angeliki N. Menegaki, 2022. "The resilience of green firms in the twirl of COVID‐19: Evidence from S&P500 Carbon Efficiency Index with a Fourier approach," Business Strategy and the Environment, Wiley Blackwell, vol. 31(1), pages 32-45, January.
    3. Sarwar, Ghulam, 2020. "Interrelations in market fears of U.S. and European equity markets," The North American Journal of Economics and Finance, Elsevier, vol. 52(C).
    4. Shabir Mohsin Hashmi & Muhammad Akram Gilal & Wing-Keung Wong, 2021. "Sustainability of Global Economic Policy and Stock Market Returns in Indonesia," Sustainability, MDPI, vol. 13(10), pages 1-18, May.
    5. Boqiang Lin & Tong Su, 2023. "Uncertainties and green bond markets: Evidence from tail dependence," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(4), pages 4458-4475, October.
    6. Marfatia, Hardik A., 2020. "Investors’ risk perceptions in the US and global stock market integration," Research in International Business and Finance, Elsevier, vol. 52(C).
    7. Sarwar, Ghulam, 2023. "Market risks that change US-European equity correlations," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 83(C).
    8. Farzan Soleymani & Eric Paquet, 2021. "Deep Graph Convolutional Reinforcement Learning for Financial Portfolio Management -- DeepPocket," Papers 2105.08664, arXiv.org.
    9. Emrah Koçak & Tarik Dogru & Khurram Shehzad & Umit Bulut, 2023. "The economic implications of the COVID-19 outbreak on tourism industry: Empirical evidence from Turkey," Tourism Economics, , vol. 29(3), pages 742-758, May.
    10. Sarwar, Ghulam, 2022. "Market risks that change domestic diversification benefits," The North American Journal of Economics and Finance, Elsevier, vol. 63(C).

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