Is there a "Nasdaq effect" in emerging equity markets?

The Nasdaq Composite has come to symbolise the new economy. As an index of technology stocks, its movements have reflected perceptions of changes in productivity growth brought about by new technology and the internet. The extraordinary rise and equally spectacular decline of the index both drew widespread attention. The Nasdaq’s peak in March 2000 marked the high point of the euphoria about the new economy, just as the subsequent shedding of 60% of its value indicated that previous valuations had been based on overly optimistic projections of a new growth era. Along with these developments, one fact that also attracted attention in the financial press and in the policy community was the close co-movement of emerging economy equity markets with the Nasdaq.10 The strong positive relationship observed between the Nasdaq and emerging market equities has been less evident between the Nasdaq and broader equity indices in industrial economies. This difference in co-movement might simply reflect differences in the composition of these indices. In particular, equity indices for economies with large technology sectors should be highly correlated with the technology-heavy Nasdaq. Indeed, it has been argued elsewhere that sectoral effects now play a larger role in driving the behaviour of equity indices across the world than in the past.11 However, the relatively higher correlations of emerging market equities with the Nasdaq may reflect other factors as well, such as a perception that these assets have common risk attributes or attract a similar class of investors. This special feature investigates whether there is a “Nasdaq effect” in the sense that changes in this index drive the movements in headline emerging market equity indices even after accounting for common global and sectoral components. The analysis suggests that changes in the Nasdaq have little additional explanatory power beyond these components, except in a few cases. However, the analysis also points to the possibility of instability in the examined relationships, particularly during 2000.