The interdependence between the US and emerging markets' industry sectors: time varying, linear and nonlinear assessments

Abstract

The analysis of the interdependence between international equity markets has been a key issue in international finance as it has important practical implications for asset allocations, risk management, and economic policy. The objective of this thesis is to re-examine the interdependence amongst international equity markets at the industry sector level. In particular, the thesis investigates time varying, long run and short run dynamic relationships between industry sectors of the United States of America and three leading emerging markets/countries: Brazil, Malaysia, and South Africa between January, 2000 and December, 2009. The thesis advances previous studies on international industry sector relationships in three specific aspects. Firstly, it examines a large number of heterogeneous industry sectors from the global economy. Secondly, existing empirical studies in this area need to be updated to include the recent turbulent global economic and financial crisis period. Thirdly, the thesis offers a deeper analysis into the intra-industry sector interdependence than previously presented. Such analysis has important implications for international diversification strategies.

A crucial empirical contribution of the study is by applying liner and non liner econometric time series techniques for the evaluation for long run global relationships and causality linkages, including testing for asymmetric causality relations both in linear and nonlinear settings. This thesis also represents [to the best of my knowledge] the first study that extensively considers time-varying relationships amongst international industry sectors by examining time varying correlations and beta stability, as well as time varying cointegration and causality relationships. Another empirical motivation of this thesis is the need to extend existing empirical studies on industry sectors by examining the impact of the recent economic and financial crisis period. Specifically, the thesis investigates the shifts in cross correlations and the dynamic causality linkages between the US and emerging markets' industry sectors before and during the 2007-2009 economic and financial crisis.

The initial exploratory analysis of the return cross-correlations indicate that, though small or in a moderate range, the existence of co-movements amongst international industry sectors as all correlations coefficients are positive and significant at the one per cent level. The results for long run relationships provided by linear (without seasonal dummies) and nonlinear cointegration tests show no significant evidence of cointegration relations between the US and the emerging markets industrial sectors. Similarly, the results of the dynamic causality linkages, between the US and emerging markets industrial sectors indicate, there exist some significant short-run causal linkages (linear and nonlinear) between these markets' industry sectors, weak linkages. Overall, the results of time varying analysis indicate unstable relationships between the returns of US and the emerging economies' industry sectors over the sample period. The empirical results of crisis suggest increased cross correlations and causality relationships among the industry sectors of US and the emerging markets under study during the crisis of the sample period than pre-crisis period of the same sample. In summary, the empirical results of the research indicate relatively weak interdependence between the US and the emerging markets industry sectors, which suggest potential diversification benefits for US investors in diversifying their portfolio investment across industrial sectors of the emerging markets.

More information

Identifiers

ORCID for Taufiq Choudhry: orcid.org/0000-0002-0463-0662

Catalogue record

Export record