Emerging Stock Returns Research Articles

What Drives Emerging Stock Market Returns? A Factor-Augmented VAR Approach

ABSTRACT This paper explores the dynamic relationship between global economic factors and emerging stock returns within a factor-augmented VAR model. I find that favorable global growth and stock market shocks have significant positive effects on emerging equity returns, whereas global uncertainty and US dollar exchange rate shocks cause a substantial fall in the returns. Global oil shocks lead to a transient increase in emerging stock returns, followed by a gradual decline. Variance decomposition analysis implies that the global uncertainty shock is the most important in the short run, explaining more than 30% of the fluctuation in emerging stock returns, while the US dollar exchange rate shock becomes the most critical in the long run, explaining more than 40%. These findings have crucial implications for international investors, as well as for policymakers in emerging market economies.

Emerging market portfolios and Islamic financial markets: Diversification benefits and safe havens

We examine the relationship between Islamic and conventional stock market returns to see if Islamic financial markets provide portfolio diversification benefits and safe havens during turbulent times. Using daily data from January 1996 through September 2020 we consider conventional emerging stock market returns and some Islamic stock market returns and examine their interactions using causality-in-variance, dynamic conditional correlations, optimal hedge ratios, and causality-in-risk tests. Causality-in-variance test results show causality between Islamic stock returns and all emerging stock returns which indicates Islamic markets provide limited safe havens. Results from both time-varying conditional correlations and the hedge ratios show that there are positive and significant correlations between emerging stock markets and Dow Jones Islamic Market Index, which implies limited portfolio diversification benefits afforded by Islamic stock markets.

Oil shocks, US economic uncertainty, and emerging stock markets

ABSTRACTThis paper investigates the impacts of oil price shocks and US economic uncertainty on emerging equity markets within a structural VAR model. I find that both precautionary oil demand and US economic uncertainty shocks have significant negative effects on emerging stock returns, whereas aggregate demand shocks cause a sustained rise of the returns. In particular, the direct effects of oil shocks on emerging stock returns are amplified by the endogenous response of US economic uncertainty. Variance decomposition analysis shows that oil market fundamentals and US economic uncertainty are an important determinant of emerging equity returns, accounting for 35% and 24% of their long-term variations, respectively. The heterogeneous impacts of structural shocks on individual emerging markets, however, suggest that a well-diversified portfolio can be obtainable.

The interaction between foreigners' trading and emerging stock returns: Evidence from Turkey

Using monthly foreign flows data on Istanbul Stock Exchange (ISE) and employing a structural VAR model, we analyze the interaction between foreigners' trading and emerging stock returns. In contrast to most of the available theory and repeated previous findings on other markets, foreign investors negative-feedback-trade with respect to past local returns in ISE, however only in rising markets and especially under macroeconomic instability. Net foreign flows forecast future market returns, but not individual stock returns. Price impacts are permanent, suggesting that foreigners' trading incorporates information. Overall, results reject previous conclusions that foreigners are uninformed positive feedback traders: rather, they are a heterogeneous group dominated by sophisticated investors able to rationally adjust their trading style in line with the market's prevailing characteristics.