Impacts of Asian financial markets on global economies

Over the past two decades, the share of emerging market economies in global gross domestic product (GDP) has risen substantially. Integration of these economies into the global trading network has also progressed. As a result, macro fundamental shocks in emerging market economies came to have substantial spillover effects on advanced economies. However, despite the dramatic output and trade growth, financial markets in emerging economies have developed at a slower pace and from a lower base. As a result, many argue that financial markets in emerging economies still have a limited role in the global financial market. The purpose of this paper is to explore to what extent spillovers from Asian financial market shocks have evolved in global financial markets during the past two decades. We particularly focus on emerging Asia and investigate what spillover effect its financial markets have had on those in advanced economies. In the first part, we examine spillover effects in stock markets. Estimating the Global Vector Autoregressive (GVAR) model, we find that spillover effects from emerging Asia became larger in the post global financial crisis (GFC) period. However, we also find that most of the spillover effects were from shocks in manufacturing sector rather than from those in financial sector. This implies that the spillover effects increased in the post GFC period because of increased manufacturing sector shocks in emerging Asia. In the second part, we examine spillover effects across different foreign exchange rates. As in the stock markets, spillover effects from emerging Asia became larger in the foreign exchange markets in the post GFC period. In particular, our high frequency data analysis suggests that an exchange rate policy change by the People's Bank of China had positive spillover effects on most of the advanced currencies in the post GFC period. The empirical results imply that the impact of China’s shocks has been rising in the global financial markets. In particular, it is likely that spillovers from China’s macro fundamentals to global financial markets will increase considerably in the next few years even if China’s financial market remains underdeveloped.