Abstract
This paper evaluates the financial spillovers between the US and emerging market economies (EMEs) using the methodology advocated by Diebold and Yilmaz (2009). Based on (i) cross-asset returns of sovereign bond, equity, and foreign exchange, and (ii) 27 individual long-term sovereign bond yields, we consistently find that bond market spillovers between the US and EMEs have strengthened following the tapering tantrum in May 2013. This implies that a US monetary tightening would have potent spillovers on other economies, and especially on financial marketsi¯ performance outside the US particularly in EMEs. The repercussions from EMEs to US are also significant and would generate undue pressure on the US affecting subsequent policy actions. The two-way interactions between the US and EMEs can pose challenges for central banks in formulating policies independently.
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