Several researchers have investigated the spillover effects between the US and foreign financial markets (e.g., Lin, Engle, and Ito, 1994; Hamao, Masulis, and Ng, 1990; Susmel and Engle, 1994; B.-S. Lee, Rui, and Wang, 2004; Baur and Jung, 2006).
The current global financial crisis that seem to have been triggered from the events in the US financial markets highlight the importance of such studies on the linkages between the US and foreign financial markets.
The extant studies in the so-called spillover literature focus mainly on the linkages between the US and various stock markets in industrialized countries of Europe and East Asia. Hamao, Masulis, and Ng (1990) study the short-term interdependence of prices and price volatilities across the Tokyo, London, and New York stock markets, and find that U.S. stock returns significantly influence the markets in London and Tokyo. King and Wadhwasi (1990) provide evidence of international bear-market contagion during the October 1987 crash. Shiller, Konya, and Tsutsui (1991) find that Tokyo participants are in general influenced by the trading patterns in New York, but not vice versa. Bennett and Kelleher (1988), Becker, Finnerty, and Tucker (1992), and Susmel and Engle (1994) report that correlations in volatility and prices appear to be causal from the United States to other countries and that lagged spillovers of price changes and price volatilities are found between major markets.
Lin, Engle, and Ito (1994) use the GARCH framework to take into account the conditional heteroskedasticity inherent in the US (NYSE) and Japanese (Nikkie) stock index time series, and find that Japanese (US) daytime returns are correlated with the US (Japanese) overnight returns. Peiro, Quesada, and Uriel (1998) analyze the transmission of information among the daily returns of the US, Japanese, and German stock markets, but ignore the potential temporal dependence among the volatilities of the three markets. B.-S. Lee, Rui, and Wang (2004) investigate the linkages between the daily returns and volatility of the NASDAQ and Asian second board markets using the EGRARCH and VAR-based models, and find strong evidence of lagged returns and volatility spillovers from the NASDAQ market to the Asian markets. Examining the spillover effects between the US and German stock markets around the opening of the two markets, Baur and Jung (2006) find that US (German) daytime returns can significantly influence the German (US) overnight returns, but that there are no spillovers from the previous daytime US returns to the German morning trading.
The present study contributes to the finance literature on the international transmission of information among the global financial markets by focusing on four high growth emerging equity markets that have hitherto received little attention in the empirical spillover literature. We investigate the short-term information transmission between the US equity market and equity markets of Brazil, Russia, India, and China, the so-called BRIC economies. The BRIC equity markets experienced extremely high growth in 2007 which briefly transformed the Chinese (Shanghai and Shenzhen) and Indian (Bombay and NSE) stock markets to the fourth and fifth largest world equity markets at the end of 2007 (World Federation of Exchanges, 2008; Merrill Lynch, 2008). We focus on the returns and volatility spillovers from the US S&P 500 index to the major equity market indices of the BRIC economies the Bovespa index of Brazil, AK&M composite of Russia, Bombay Sensex index of India, and Shangai SE Composite of China.
