Chapter 11 - Impact of US Federal Reserve Policies on Frontier Markets

Abstract

Since frontier markets are at their early stages of growth and capitalization they can provide convenient investment opportunities. That is why interest in frontier markets is developing remarkably. In this paper we attempt to explore the impact of US Federal Reserve (Fed) policies after the global financial crisis (GFC) on frontier markets. We review frontier markets and the global financial crisis first. Our analytic part starts with diagnosing the returns and volatility of these markets with daily data from MSCI indices (from 24 frontier market countries covered by the MSCI) from the beginning of 2011–15. Then we investigate the interaction between the US and frontier markets. Primarily, we test for the ARCH effect to detect the change in volatility through time. Then we check for the stationarity of the stock index return series. The main theme of the study is the existence and analysis of spillover effects in the GARCH framework. We also test for the existence and direction of Granger causality between the US and frontier markets.