Measuring Spillovers between the US and Emerging Markets

This paper evaluates the financial spillovers between the US and emerging market economies (EMEs) using the methodology advocated by Diebold and Yilmaz (2009). Based on (i) cross-asset returns of sovereign bond, equity, and foreign exchange, and (ii) 27 individual long-term sovereign bond yields, we consistently find that bond market spillovers between the US and EMEs have strengthened following the tapering tantrum in May 2013. This implies that a US monetary tightening would have potent spillovers on other economies, and especially on financial markets' performance outside the US particularly in EMEs. The repercussions from EMEs to US are also significant and would generate undue pressure on the US affecting subsequent policy actions. The two-way interactions between the US and EMEs can pose challenges for central banks in formulating policies independently