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

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  • Dohyoung Kwon

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.

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  • Dohyoung Kwon, 2022. "What Drives Emerging Stock Market Returns? A Factor-Augmented VAR Approach," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 58(5), pages 1215-1232, April.
    • Handle: RePEc:mes:emfitr:v:58:y:2022:i:5:p:1215-1232
    DOI: 10.1080/1540496X.2020.1860748
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