In the Shadow of the U nited S tates: The International Transmission Effect of Asset Returns

We examine how fluctuations in financial and housing markets in the United States affect asset returns and GDP in Hong Kong. In contrast to studies using linear specifications, which find that the United States and Hong Kong are virtually delinked in terms of the asset markets, our regime‐switching models indicate that an unexpected change in US stock returns, followed by the TED spread, has the most significant effect on Hong Kong asset returns and GDP, typically in a regime of high return and low volatility. For in‐sample one‐step‐ahead forecasting, the US term spread is the best predictor.