Abstract
We study the economic and non-economic sources of stock return comovements of the emerging Indian equity market and the developed equity markets of the US, UK, Germany, France, Canada and Japan. Our findings show that the probability of extreme comovements in the economic contraction regime is relatively higher than in the economic expansion regime. We show that international interest rates, inflation uncertainty and dividend yields are the main drivers of the asymmetric return comovements. Findings reported in the paper imply that the impact of interest rates and inflation on return comovements could be used for anticipating financial contagion and/or spillover effects. This is particularly critical since during extreme market conditions, the tail return comovements can potentially reveal critical information for active portfolio management.
Highlights
Globalisation of financial markets has created both opportunities and challenges for international investors
We study the economic and non-economic sources of stock return comovements of the emerging Indian equity market and the developed equity markets of the US, UK, Germany, France, Canada and Japan
We show that international interest rates, inflation uncertainty and dividend yields are the main drivers of the asymmetric return comovements
Summary
Globalisation of financial markets has created both opportunities and challenges for international investors. During the US-led subprime crisis in 2008–2009, India experienced an outflow of $12 billion (SEBI 2011) Such volatility of the international portfolio flows during the recent global economic crisis has triggered serious macroeconomic challenges for emerging economies such as India since the stock markets are considered as a leading indicator of a country’s economic well-being. An understanding of the causes of extreme stock return comovements will be extremely valuable to both policy makers in emerging markets and international investors In this context, our paper makes two significant contributions. First we investigate both the probability and magnitude of asymmetric return comovements between the Indian emerging market and six developed stock markets.
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