What Drives Emerging Stock Market Returns? A Factor-Augmented VAR Approach. Issue 5 (9th April 2022)

• Record Type: Journal Article
• Authors: Kwon, Dohyoung
• Is Part Of: Emerging markets finance & trade. Volume 58:Issue 5(2022)
• Page Start: 1215
• Page End: 1232
• Publication Date: 2022-04-09
• Subjects: Emerging stock returns -- factor-augmented VAR -- global economic factors; F36 -- F65 -- G15; Balkan Peninsula -- Commerce -- Periodicals; Balkan Peninsula -- Foreign economic relations -- Periodicals; Europe, Central -- Commerce -- Periodicals; Europe, Central -- Foreign economic relations -- Periodicals; Europe, Eastern -- Commerce -- Periodicals; Europe, Eastern -- Foreign economic relations -- Periodicals; Turkey -- Commerce -- Periodicals; Turkey -- Foreign economic relations -- Periodicals; Asia -- Commerce -- Periodicals; Asia -- Foreign economic relations -- Periodicals; Eurasia -- Commerce -- Periodicals; Eurasia -- Foreign economic relations -- Periodicals; 382.05
• DOI: 10.1080/1540496X.2020.1860748
• Languages: English
• ISSNs: 1540-496X

Abstract

ABSTRACT: This paper explores the dynamic relationship between global economic factors and emerging stock returns within a factor-augmented VAR model. I find that favorable global growth and stock market shocks have significant positive effects on emerging equity returns, whereas global uncertainty and US dollar exchange rate shocks cause a substantial fall in the returns. Global oil shocks lead to a transient increase in emerging stock returns, followed by a gradual decline. Variance decomposition analysis implies that the global uncertainty shock is the most important in the short run, explaining more than 30% of the fluctuation in emerging stock returns, while the US dollar exchange rate shock becomes the most critical in the long run, explaining more than 40%. These findings have crucial implications for international investors, as well as for policymakers in emerging market economies.