KTH/CESIS Working Paper Series in Economics and Institutions of Innovation
Dynamic causal linkages between the US stock market and the stock markets of the East Asian economies
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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