Exchange Market Pressure and Stock-Price Spillovers in Emerging Markets

Much research has been conducted on whether events in stock markets affect asset markets, or vice versa. Since causality has been shown to run in either direction (and sometimes both simultaneously), this relationship must be tested empirically on a case-by-case basis. This study does so, using a monthly index of Exchange Market Pressure (EMP) rather than simple appreciations or depreciations, for ten emerging markets. Vector Autoregressive (VAR) models, which capture regional and global effects, show that asset-market shocks often (but not always) spill over to EMP. Causality often runs the opposite direction as well. Some countries, such as Thailand and Poland, serve as important sources of regional shocks, while others, such as Croatia, are more susceptible to them. While it is often assumed that events in U.S. markets easily spill over to the rest of the world, declines in U.S. stock prices lead to lower emerging market stock prices or higher EMP in relatively few cases.