Global risk factors and stock returns evidence from emerging markets

Abstract

Abstract newlineThis dissertation investigates the impact of global risk factors on the emerging stock markets newline(EMs). The study primarily examines three dimensions of global risk on the emerging markets newlinein the form of three independent essays. The first essay examines whether the effects of newlineinternational (US-based) economic policy uncertainty, geopolitical risk and financial stress newlineimpact the emerging stock markets alike. The study considers 24 emerging markets to newlineunderstand the receptivity of these markets to the various US based macroeconomic shocks. newlineThe study uses monthly data ranging from January 1997 to May 2018 and applies the newlinenonparametric causality-in-quantiles test as the methodological approach. The study finds that: newline(a) the impact of these shocks is heterogeneous across the markets in terms of causality and newlineintensity. (b) the influence of EPU is mostly profound and significant as compared to other two newlineshock indicators i.e. GPR and FS. (c) the causality-in-mean is more significant and stronger newlinerather than the causality-in-variance. Lastly, (d) the predictability of EPU, GPR and FS is newlinecomparatively strong in lower tails. The author believes that these findings are relevant to the newlineinvestors in EMs for the purpose of international portfolio diversification and developing newlineinvestment strategies at times of turbulent economic conditions. newlineThe second essay revisits the impact of oil shocks upon the emerging equity markets by using newlinethe novel shock decomposition algorithm proposed by Ready (2018). The study considers 24 newlineemerging equity markets for the period spanning over July 15, 2002 to June 18, 2018 and newlinebifurcate them on the basis of oil-dependence. To understand the time-varying co-movements newlinebetween oil prices and stock returns the authors use rolling and dynamic conditional correlation newlineanalysis. Whereas, the regime and state-specific dependence of stock returns on the oil shocks newlineis captured by the Markov Regime Switching and Quantile Regression models respectively. newline