The influence of U.S. equity returns on Asian-Pacific equity markets

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This paper examines monthly and daily returns in eleven Asian-Pacific equity markets and the U.S. market, showing that the Asian-Pacific markets systematically follow the returns in the U.S. market (S&P 500 index). For investment managers, the important findings include the fact that each Asian-Pacific market moves differently in response to U.S. market changes over a given time period and the response of most of these markets to changes in the U.S. market is not stable over time. Therefore, in their attempt to diversify a portfolio using individual Asian-Pacific country equities, past correlations and covariances are not necessarily a good predictor of future values, especially for the less developed countries. On average, more developed markets react more strongly to U.S. market changes than do the less developed markets. All markets exhibit asymmetries relative to the U.S. market, where reactions are stronger following down-days than following up-days. Finally, the tests suggest that the Asian-Pacific markets have little or no influence on U.S. market returns.

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    • Table 1. Characteristics of markets and market indexes
    • Table 2. Beta estimates for regressing the foreign index monthly returns (based on month-beg. prices) on the S&P 500 index monthly returns (based on month-end prices) [e.g., Nikkei 225 = f(S&P 500)] using all S&P 500 monthly returns*
    • Table 3. Regression coefficients (or betas) for regressing the foreign index daily returns on the S&P 500 index [e.g., Nikkei 225t+1 = f(S&P 500t)] using S&P 500 daily returns of +/–1% or higher
    • Table 4. Regression coefficients (or betas) for regressing the S&P 500 index daily returns on the foreign index daily returns [e.g., S&P 500t = f(Nikkei 225t)]
    • Table 5. Regression coefficients for regressing the foreign index on the S&P 500 index [e.g., Nikkei 225t+1 = f(S&P 500t)]