The Transmission of U.S. Equity Shocks to Emerging Stock Markets and the Role of U.S. Monetary Policy

Abstract

This master thesis examines the equity return connectedness between the U.S. and 12 emerging market countries between 1994 to 2017, applying a network approach based on variance decompositions from a vector autoregressive model (VAR), proposed by Diebold and Yilmaz (2012). Our findings suggest that return spillovers between the countries exist in varying strength, and that overall spillovers increase in crisis periods. There is empirical evidence for the existence of two regional connectedness clusters, one in Asia and one between the U.S. and Latin America. The majority of emerging market countries are net receivers of equity shocks whereas the U.S. and Mexico play the largest role in transmitting directional shocks to other markets. Financial integration significantly determines return spillovers from the U.S. to emerging markets which provides support for the portfolio channel theory. Finally, the reaction of countries to shocks arising from U.S. monetary policy surprises is widely consistent with our spillover analysis. Our results suggest that Mexico and Brazil are most sensitive