Unconventional monetary policies and international spillover to Asian stock markets

This paper focuses on the effects of global liquidity produced by the most influential countries (United States, United Kingdom, European Union members, and Japan) and quantitative easing (QE) on Asian stock markets. First, this paper examines the relative importance of the stock return global connectedness from global markets to nine Asian financial markets, and regional connectedness within them, by estimating spillover indices of daily stock returns (2005-2016).  These indices are obtained based on the forecast error variance decompositions from a generalized impulse response function introduced by Diebold and Yilmaz (2012, 2014). The results show that in terms of a per-giving-and-receiving spillover index, adjusted by the number of combination of pairs, the Asian regional return spillover becomes almost equal to the global one in size. This is particularly true during the global financial crisis and US tapering, suggesting that the global shock could be mitigated by regional financial integration. Moreover, recent Asian spillover to global markets regained its momentum rapidly, comparably to that during the global crisis period, indicating that the monetary authorities in advanced countries should take the presence of financial spillbacks from Asian markets into consideration.

Second, in order to capture the international financial drivers of capital flow, this paper assesses the influences of key variables on estimated spillovers, some of which represent non-conventional monetary policy measures taken by the advanced countries. The results show that the US Fed’s QE plays a certain role in increasing the spillover from the US to Asian stock markets. Moreover, the slowdown of the Chinese economy turns out to generate additional shock on the Asian stock markets, which highlights the increasing risk of Asian regional financial integration. However, the results obtained from the panel regression indicate that the higher the inflation rate becomes in Asia, the larger the global spillover becomes, suggesting the importance of strong fundamentals to prevent the external financial shocks.