Financial spillovers in Asian emerging economies

Abstract

This paper explores financial spillovers between emerging Asia and advanced economies using principal component analysis to extract common shocks in Asia. We first investigate stock market spillovers across the regions and find that spillovers from emerging Asia became significant after the global financial crisis. However, our industry-level analysis shows that the increased spillovers can be attributed to the first principal component (PC) in the manufacturing sector rather than to the first PC in the financial sector. This implies that the rise of the Asian manufacturing sector in the global market played a key role in enhancing the stock market spillovers. We next examine bilateral spillovers in short-term and long-term rates. In the tapering period, we find significant spillovers in long-term rates from the first PC in emerging Asia to Europe and the United States. However, these spillovers were much smaller than the stock market spillovers in magnitude.