Spillover effects from China and the United States to Key Regional Emerging Markets: A dynamic analysis

Abstract

While a limited number of studies have employed wavelet techniques to distinguish between market interdependence and contagion within the context of market co-movement, many of them have primarily relied on conclusions derived from multivariate wavelet analysis. In contrast, this paper introduces a complementary approach based on the univariate wavelet technique, specifically the Maximal Overlap Discrete Wavelet Transform (MODWT). This approach entails assessing the correlation between key market series that have been decomposed into both the time and frequency domains. The proposed technique is applied to evaluate the co-movement and dynamic spillover effects from two prominent advanced markets, namely China and the United States, to six major emerging economies across different regions. The findings obtained through various wavelet techniques consistently support the notion that interdependence is the predominant characteristic in terms of shock spillovers and stock market co-movement between the selected advanced and key emerging markets. Furthermore, the results indicate that both the US and China cycles are synchronized with those of the key emerging economies. These insights are of significant importance for investors and asset managers, offering valuable guidance for asset diversification and portfolio allocation strategies during both tranquil and turbulent periods.