Scandinavian Working Papers in Economics
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CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology KTH/CESIS Working Paper Series in Economics and Institutions of Innovation

No 236:
Dynamic causal linkages between the US stock market and the stock markets of the East Asian economies

Hyunjoo Kim

Abstract: This paper presents an empirical study in the dynamic causal relationships between each of national stock market of the East Asian economies (Hong Kong, Singapore, Korea (Rep. of), and Taiwan) and the U.S. stock market. This paper complements the existing studies by analyzing the dynamic causal relationship between the U.S. stock market and the East Asian stock markets at different time scales by employing wavelet analysis. Analyses of pre-crisis, East Asian financial crisis (year 1997-2000), inter-crisis and the subprime mortgage crisis (year 2007-2009) periods are conducted to compare the international transmission mechanism of stock market movements. The main empirical insight is that the causal relationship is stronger at finer time scales, whereas the relationship is less and less apparent at longer time horizons. The empirical evidence of the current study indicates that the U.S. stock market Granger-causes almost all the East Asian stock markets regardless of non-crisis periods or not, yet it applies only to the later two sub-sample periods. In general, the empirical results show that short-run causal linkages of the U.S. market to the East Asian economies are more dominant than the causal linkages of the other direction. The results also show that those stock markets are more integrated after the East Asian financial crisis period. Innovations in the U.S. market are transmitted to the stock markets of the East Asian economies in a similar fashion, whereas the degree of responsiveness of those East Asian stock markets differs between the inter-crisis period and the subprime mortgage crisis.

Keywords: Wavelet analysis; stock market; granger causality; (follow links to similar papers)

JEL-Codes: C69; G15; G29; (follow links to similar papers)

23 pages, October 27, 2010

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