Emerging Market

Introduction

The purpose of this research paper is to analyze the emerging market through both macro and micro economic perspectives. Particularly since the economic and monetary crises of the 1990s, emerging countries have continually been gaining importance for the world economy. In essence, this can primarily be recognized by intensified foreign trade relations with industrialized countries as well as by—particularly in recent times— growing trade activities among the emerging markets. This advancement is predominantly backed by huge commodity deposits which provide the basis for the occurred enlargement of export capacities.

Consequently, increasing earnings due to these commodity trade activities lead to growing affluence, which in turn is recognizable by growing consumption rates and rising domestic purchasing power. This still ongoing catching-up process was additionally supported by increased use of outsourcing measures by companies in industrialized countries. These companies have taken advantage of low wages, lower manufacturing costs and in the end, higher profit margins. Furthermore, both the preparing and selling of commodities as well as the efficiency of the manufacturing process were additionally accelerated by the ongoing technological progress. As companies in the emerging countries are likely to benefit in the course of the outlined catching-up process, international investors as well as scientific literature have focused on economic development and its impact on equity markets. To the best of our knowledge, all existing studies concentrate on country-specific interdependencies between macroeconomic variables and the progress of the national stock market indices in the respective country. By using hitherto unconsidered data, this article abandons the aforementioned scientific approach of examining each country separately and carries out a cross-national sector analysis instead.

Due to the fact that several economic and monetary crises occurred within the examination period, it is necessary to verify the stability of the regression coefficients over time. The identification of structural breaks and the analysis of consequential sector specific sub-samples make it possible to minimize potential crisis effects and thus, to enhance the validity of the test results.

On the basis of the implemented procedures, we find strong evidence of significant interactions between the US economy and emerging market-sector indices. Taking into account the distinctive features of each sector, the results are largely in line with the a priori defined hypotheses. However, as the vast majority benefited from increasing commodity prices during the examination sample, we conclude that the outlined catching-up process is predominantly backed by intensified commodity exports.

Discussion

Scientific literature has up to now concentrated on country-specific interdependencies. Numerous studies such as those by Fama (1981), Geske and Roll (1983) as well as Lee (1992) provide empirical evidence of significant influences of macroeconomic variables on the progress of stock markets. According to Chen et al. (1986) these macroeconomic factors become risk factors in equity markets via the channels of future corporate cash flow, required rate of return and future dividends. As emerging economies are becoming increasingly important for the world economy, various researchers have directed their attention to them in the recent past. Naka et al. (1998) use the VECM according ...