Interrelations of US market fears and emerging markets returns: Global evidence

We investigate the interrelations between U.S. stock market uncertainty (VIX) and equity returns in several emerging markets (EMs) in an integrated multivariate system that allows the interactions through the first and second moments of VIX and return processes. Our VARMAX-CCC-QGARCH model finds significant interactions in the covariance terms of VIX and EM returns, which facilitate risk transmission. Changes in VIX negatively affect EM returns, which also significantly affect VIX changes. We find that VIX changes and EM returns collectively have predictive ability for each other. Further, VIX shocks contribute 22-42% to the prediction error of EM returns. Our results underscore the importance of capturing interactions between VIX changes and EM returns through their variance-covariance matrix and have important implications for global diversification, flight-to-safety choices, and hedging the cross-market risks.