Spillover effect of US monetary policy to ASEAN stock markets: Evidence from Indonesia, Singapore, and Thailand

•There are two distinct regimes: economic expansion and economic decline.•US interest rates have a negative effect on the selected ASEAN stock markets during expansion.•ASEAN stock markets have a positive comovement with the US stock market in both regimes.•Lagged stock returns play a small role for future movements in ASEAN stock markets.

In this paper, we investigate the spillover effect from US monetary policy to selected ASEAN stock markets by employing Markov-switching models. Based on univariate Markov-switching models, we confirm the existence of two distinct regimes for both US monetary policy and the stock markets. By applying multivariate Markov-switching models, we find that US interest rates have a negative effect on the selected ASEAN stock markets during economic expansion periods. However, this kind of effect disappears during economic crisis periods. Our empirical results indicate that the spillover effect from US monetary policy influences the ASEAN stock markets only during the tranquil period. These results have important implications for the transmission mechanisms of asset price, such as the credit channel, trade channel, and balance sheet channel.