Dynamic linkages between Thai and international stock markets

Transcription

1 Universiy of Wollongong Research Online Faculy of Commerce - Papers (Archive) Faculy of Business 2007 Dynamic linkages beween Thai and inernaional sock markes Abbas Valadkhani Universiy of Wollongong, abbas@uow.edu.au S. Chanchara Universiy of Wollongong, sc983@uow.edu.au Publicaion Deails This aricle originally published as: Valadkhani, A, and Chanchara, S, Dynamic Linkages beween Thai and Inernaional Sock Markes, Journal of Economic Sudies, 35 (5), , 2008, in press (acceped 7 Augus 2007). Copyrigh Emerald Research Online is he open access insiuional reposiory for he Universiy of Wollongong. For furher informaion conac he UOW Library: research-pubs@uow.edu.au

2 Dynamic linkages beween Thai and inernaional sock markes Absrac This paper invesigaes he exisence of coinegraion and causaliy beween he sock marke price indices of Thailand and is major rading parners (Ausralia, Hong Kong, Indonesia, Japan, Korea, Malaysia, he Philippines, Singapore, Taiwan, he UK and he US), using monhly daa spanning December 987 o December Boh he Engle-Granger wo-sep procedure (assuming no srucural breaks) and he Gregory and Hansen (996) es (allowing for one srucural break) provide no evidence of a long-run relaionship beween he sock prices of Thailand and hese counries. Based on he empirical resuls obained from hese wo residual-based coinegraion ess, poenial long-run benefis exis from diversifying he invesmen porfolios inernaionally o reduce he associaed sysemaic risks across counries. However, in he shor run, hree unidirecional Granger causaliies run from he sock reurns of Hong Kong, he Philippines and he UK o hose of Thailand, pair-wise. Furhermore, here are wo unidirecional causaliies running from he sock reurns of Thailand o hose of Indonesia and he US. We also found empirical evidence of bidirecional Granger causaliy, suggesing ha he sock reurns of Thailand and hree of is neighbouring counries (Malaysia, Singapore and Taiwan) are inerrelaed. No previous sudy examines he possibiliy ha he pair-wise long-run relaionship beween he sock prices of Thailand and hose of boh emerging and developed markes may have been subjec o a srucural break. Keywords hailand, sock markes, coinegraion, srucural breaks Disciplines Business Social and Behavioral Sciences Publicaion Deails This aricle originally published as: Valadkhani, A, and Chanchara, S, Dynamic Linkages beween Thai and Inernaional Sock Markes, Journal of Economic Sudies, 35 (5), , 2008, in press (acceped 7 Augus 2007). Copyrigh Emerald This journal aricle is available a Research Online: hp://ro.uow.edu.au/commpapers/354

3 Dynamic linkages beween Thai and inernaional sock markes Abbas Valadkhani and Surachai Chanchara School of Economics, Universiy of Wollongong, NSW 2522 Ausralia This paper invesigaes he exisence of coinegraion and causaliy beween he sock marke price indices of Thailand and is major rading parners (Ausralia, Hong Kong, Indonesia, Japan, Korea, Malaysia, he Philippines, Singapore, Taiwan, he UK and he US), using monhly daa spanning December 987 o December Boh he Engle- Granger wo-sep procedure (assuming no srucural breaks) and he Gregory and Hansen (996) es (allowing for one srucural break) provide no evidence of a long-run relaionship beween he sock prices of Thailand and hese counries. Based on he empirical resuls obained from hese wo residual-based coinegraion ess, poenial long-run benefis exis from diversifying he invesmen porfolios inernaionally o reduce he associaed sysemaic risks across counries. However, in he shor run, hree unidirecional Granger causaliies run from he sock reurns of Hong Kong, he Philippines and he UK o hose of Thailand, pair-wise. Furhermore, here are wo unidirecional causaliies running from he sock reurns of Thailand o hose of Indonesia and he US. We also found empirical evidence of bidirecional Granger causaliy, suggesing ha he sock reurns of Thailand and hree of is neighbouring counries (Malaysia, Singapore and Taiwan) are inerrelaed. No previous sudy examines he possibiliy ha he pair-wise long-run relaionship beween he sock prices of Thailand and hose of boh emerging and developed markes may have been subjec o a srucural break. Keywords Sock markes, Coinegraion, Srucural breaks, Thailand Paper ype Research paper. Inroducion There are many reasons why sock markes of differen counries may have significan co-movemens. For example global capial movemens and he presence of economic ies and regional policy coordinaion among counries can direcly or indirecly inerconnec heir sock prices hrough ime. According o Phylakis and Ravazzolo (2005), unlike oher crises, he Asian crisis engulfed a group of counries ha were boh financially and economically inegraed prior o he crisis. However, Chan e al. (997) argue ha alhough common economic and geographic facors were considered as crucial facors, hey were no necessarily major causes of naional sock markes o follow he same sochasic rend. I is also argued ha here is less evidence of sock marke inegraion afer major sock marke crises and hence inernaional diversificaion among sock markes can be underaken more effecively due o he lack of long-run co-movemens of inernaional sock prices (Paev e al., 2006). In he conex of he Malaysian sock marke, for example, Ibrahim and Aziz (2003) provide

4 some evidence ha he Asian crisis appears o give rise o irregulariy in he ineracions beween sock prices and macroeconomic variables. A growing ineres in he inegraion of inernaional sock markes is eviden in he number of empirical sudies ha examine he various aspecs of sock marke linkages. These sudies were mainly moivaed by he sock marke crash in Ocober 987 and subsequen Asian financial crisis in 997. For insance, Susmel and Engle (994), Fraser and Power (997), Kanas (998b) and Frazscher (2002) examine volailiy spillovers across sock markes; while Phylakis and Ravazzolo (2002) repor heir es resuls using inernaional capial asse pricing models. In addiion o hese sudies, coinegraion echniques in he lieraure are widely used o invesigae he long-run relaionships beween sock markes. These sudies can be classified ino hree groups. Firs, some focus mainly on developed markes in he US, Canada, Europe and Japan (for example, Kasa, 992; Richards, 995; Choudhry, 996; Kanas, 998a; Hamori and Imamura, 2000; Ahlgren and Anell, 2002) and find some evidence ha here are inerdependen linkages among he sock markes of developed counries. Second, oher sudies in he lieraure examine he sock price linkages among only emerging sock markes, wihou capuring he imporan influence of sock markes in developed counries. They find only weak evidence of a relaionship among he Asian sock markes (for more deails see Chaudhuri, 997; Sharma and Wongbangpo, 2002; Worhingon e al., 2003; Yang e al., 2003). The las group of sudies examines he inerdependencies beween developed and emerging markes bu hey do no incorporae he effec of possible srucural changes in he long-run relaionships, such as he 987 grea crash and he Asian financial crisis in 997. Due o earlier inconclusive resuls, here is no consensus among previous sudies as o wheher inernaional sock markes are inerdependen. For insance, while Masih and Masih (999) and Syriopoulos (2004) found some pair-wise long-run relaionships beween sock markes in developed counries and he sock markes of emerging counries, oher sudies (such as Chang, 200; Ng, 2002; Climen and Meneu, 2003) do no find any empirical evidence suggesing ha sock marke dependence exiss among such counries. These sudies have deepened our undersanding of he inerplay among inernaional sock marke linkages; however, allowing for a possible break in coinegraion vecors, his paper specifically examines he inerplay beween he sock markes in Thailand and oher counries, including boh developed and emerging markes. Compared o previous sudies, his paper differs in wo aspecs. Firs, no previous sudy examines he possibiliy ha he pair-wise long-run relaionship beween he sock prices of wo counries may have been subjec o a srucural break. In addiion o he Engle Granger wo-sep procedure, his paper employs he Gregory and Hansen (GH, 996) coinegraion es, which allows for a srucural break in he coinegraing vecor. Gregory and Hansen argue ha srucural breaks have imporan implicaions for coinegraion analysis because hese breaks can decrease he power of coinegraion ess and lead o he under-rejecion of he null hypohesis of no coinegraion. Second, as discussed earlier, mos previous sudies focus on developed markes, and few examine boh emerging and developed markes. In conras, his sudy examines wheher he Thai sock marke is linked wih he sock markes of is major rading parners. No exising sudy focuses specifically on he Thai sock marke, alhough some include Thailand in heir sample counries (for example, Masih and 2

5 Masih, 999; Chang, 200; Ng, 2002; Sharma and Wongbangpo, 2002; Climen and Meneu, 2003; Worhingon e al., 2003; Phylakis and Ravazzolo, 2005). The 997 Asian financial crisis firs began wih he floaing of he Thai bah in July 997, and soon afer, he crisis spread rapidly o he Philippines, Malaysia, Indonesia and Korea. Following his crisis, relaively small depreciaions also engulfed Singapore and Japan (Barro, 200). Therefore, Thailand can be considered as an imporan case among oher emerging markes. In 2004, on he Sock Exchange of Thailand (SET), marke urnover was 93.8 per cen, here were 465 lised domesic companies, and he value raded was $US09,949 million. The SET was classified as he ninh highes among emerging markes in erms of hese hree measures, and he nineeenh, wenieh and weny-fourh on a global scale. In erms of marke capialisaion, he SET reached a record high $US5,400 million, which ranked welfh-highes among all emerging markes and hiry-firs in he world (Sandard and Poor s, 2005). This paper invesigaes he long-run and shor-run relaionships beween he Thai sock marke and hose of is major rading parners: Ausralia, Hong Kong, Indonesia, Japan, Korea, Malaysia, he Philippines, Singapore, Taiwan, he UK and he US. We chose hese eleven counries because of heir relaively high share of Thai expors and impors. I should be noed ha Japan and he US are Thailand s wo bigges rading parners. Malaysia, Singapore, Indonesia and he Philippines are all members of he Associaion of Souheas Asian Naions (ASEAN), which aims o remove rade barriers among is member counries. Hong Kong, Taiwan and Ausralia are also among Thailand s op-en rading parners, followed by Korea and he UK, which are jus ouside he op en. The remainder of he paper is srucured as follows. Secion discusses briefly he empirical mehodology adoped in he paper. Secion 2 describes he summary saisics of he daa. Secion 3 presens he empirical resuls of coinegraion and causaliy ess. Finally, Secion 4 provides some concluding remarks. 2. Empirical mehodology We iniially performed he augmened Dickey-Fuller (ADF) uni roo es o examine he ime series properies of he daa wihou allowing for any srucural breaks. The ADF es is conduced using his equaion: y k = µ + β+ αy + c y + ε () i= i i Where y denoes he ime series being esed; y = ln( P i ), ln( P i ) is he naural logarihm of he sock marke price index in counry i; is he firs differen operaor; is a ime rend erm; k denoes he opimal lag lengh; and ε is a whie noise disurbance erm. In his paper, he lowes value of he Akaike informaion crierion (AIC) was used as a guide o deermine he opimal lag lengh in he ADF regression. These lags augmen he ADF regression o ensure ha he error erm is whie noise and free of serial correlaion. In addiion, he Phillips-Perron (PP) es was used as an alernaive nonparameric model o conrol for serial correlaion. Using he PP es ensures ha he higher-order serial correlaions in he ADF equaion were handled properly. Tha is, he ADF es correcs for higher-order auocorrelaion by including lagged differenced erms on he righ-hand side of he ADF equaion; whereas he PP es correcs he ADF -saisic by removing he serial correlaion in i. This nonparameric -es uses he 3

6 Newey-Wes heeroscedasiciy auocorrelaion consisen esimae, and is robus o heeroscedasiciy and auocorrelaion of unknown form. An imporan shorcoming associaed wih he ADF and PP ess is ha hey do no allow for he effec of srucural breaks. Perron (989) argues ha if a srucural break in a series is ignored, uni roo ess can be erroneous in rejecing null hypohesis. Zivo and Andrews (ZA, 992) developed mehods o search endogenously for a srucural break in he daa. We employ heir model C, which allows for one srucural break in boh he inercep and slope coefficiens in he following equaion: y = µ + β+ θdu + γdt + αy + k + ci y i ε (2) i= Where DU = if > TB, oherwise zero; TB denoes he ime of break; and DT = TB if > TB, oherwise zero. The rimming region, in which we searched for TB covers he 0.5T-0.85T period, where T is he sample size. Following Chaudhuri and Wu (2003) and Narayan and Smyh (2005), we seleced he break poin (TB) based on he minimum value of he saisic for α. In his sudy, k max is se equal o 2. Afer deermining he order of inegraion of each variable, we needed o es for he exisence of any long-run relaionship beween he sock prices of Thailand and is major rading parners. We employed he Engle-Granger wo-sep procedure firs by obaining he resuling residuals of he following equaion, and hen conducing a uni roo es on hem: y = µ 0+ β+ ϕx + ε (3) Where y and x are he naural log of he sock price indices of Thailand and one of is major rading parners, respecively. According o Engle and Granger (987), if boh y and x are I(), and ˆ ε is I(0), hen a long-run relaionship beween hese wo variables exiss. The resuling errorcorrecion model (ECM) from such a model can hen be wrien as: k k 2 (4) y = φ+ λ x + δ y + ηecm + v i i i i i= 0 i= Whereλ i s are he esimaed shor-erm coefficiens; δ s i denoes he esimaed coefficiens of he lagged dependen variables added o ensure v or he disurbance erm is whie noise; η is he feedback effec capuring he speed of adjusmen, whereby shor-erm dynamics converge o he long-erm equilibrium pah indicaed in equaion (3); and ECM or ˆ ε is obained from equaion (3) by he OLS mehod. The general-o-specific mehodology can hen be used o omi insignifican variables in equaion (4) based on a baery of maximum likelihood ess. In his mehod join zero resricions are imposed on explanaory variables in he unresriced (general) model o obain a parsimonious model. The null hypohesis of no coinegraion is rejeced if η< 0 and is saisically significan. The lack of evidence of coinegraion in previous sudies in he lieraure could be aribued o he ignorance of he srucural break in coinegraing vecor. To address his issue, we also used he GH (996) es. GH (996) posulae hree alernaive models similar o hose proposed by ZA (992) o capure he changes in parameers of he coinegraing vecor. Firs, he level shif model (C), which assumes a change only in he inercep, as shown below: 4

7 y = µ 0+ θ DU + µ x + ε (5) The second model, a level shif and change in rend (C/T), akes his form: y = µ 0+ θ DU + β + µ x + ε (6) The hird model, which allows for changes in boh he inercep and slope of he coinegraion vecor (C/S), is presened as: y = µ + θ DU + β + µ x + µ x DU + ε (7) 0 2 Where DU is defined as previously in equaion (2). Inuiively, wihin he range of 0.5T-0.85T, his echnique searches for a paricular TB, which minimises he value of he ADF * saisic for ˆ ε. The GH (996) mehod ess he null hypohesis of no coinegraion agains he alernaive hypohesis of coinegraion wih a single srucural break a ime TB, which is deermined endogenously. Finally, we conduced he Granger causaliy es based on he error correcion model specified in equaion (4). A variable such as x (he sock reurns) Granger causes y if is pas values can explain, bu pas values of y y do no explain (Granger, 969). If he wo variables are no coinegraed, and η in equaion (4) is no negaive and significan, he following bivariae VAR equaions will hen be used for he causaliy es: k k 2 (8) y = φ+ λ x + λ x + δ y + v 0 i i i i i= i= k k 2 (9) x = φ + λ y + λ y + δ x + v 0 i i i i i= i= On he oher hand, if y and x are coinegraed, hese error correcion models are adoped: k k 2 (0) y = φ+ λ x + λ x + δ y + ηecm + v 0 i i i i i= i= k k 2 () x = φ + λ y + λ y + δ x + η ECM + v 0 i i i i i= i= The Granger causaliy es can be conduced under wo assumpions. Firs, if y and x are no coinegraed, hen we can use equaions (8) and (9) o es he following wo null hypoheses: If in equaion (8) Ho : λ = λ2 =... = λk = 0 is rejeced, hen j j x = ln P ln P, or he sock price reurn in counry j, Granger causes i i y = ln P ln P or he sock price reurn in counry i. This can be wrien as x y. Similarly, if, in equaion (9), H o : λ = λ 2 =... = λ k= 0 is rejeced, hen we can conclude ha y causes x or y x. If boh null hypoheses are rejeced simulaneously, here would be a bidirecional causaliy beween he wo variables, ha is, y x. Second, if y and x are in fac coinegraed, hen we need o use equaions (0) and () o es he same wo hypoheses. The inclusion of ECM in hese wo equaions ensures ha he long-erm run properies of he daa are no los when dealing wih he firs difference form. If in equaion (0), Ho : λ = λ2 =... = λk = 0 is rejeced, hen x y ( x Granger causes y ), or x y. In he same way, if x 5

8 in equaion (), H o : λ = λ 2 =... = λ k= 0 is rejeced, hen one can conclude ha y x. If boh H and H are rejeced, he causaliy beween he wo variables is bidirecional, or y x. o o 3. Daa and summary saisics The daa included in his paper include he sock prices of hese 2 counries: Thailand (), Ausralia (AU), Hong Kong (HK), Indonesia (IN), Japan (JA), Korea (KO), Malaysia (MA), he Philippines (PH), Singapore (SG), Taiwan (TA), he UK and he US. Monhly daa span December 987 o December 2005, wih a base value of 00 in December 987. All sock price indices were obained from Morgan Sanley Capial Inernaional (MSCI) which is one of he widely used sources of financial daa in he lieraure (Hamori and Imamura, 2000; Ahlgren and Anell, 2002; Ng, 2002; Climen and Meneu, 2003; Worhingon e al., 2003) in erms of he degree of comparabiliy and avoidance of dual lisings. Since his paper is concerned wih he comparaive performance of he inernaional sock markes, all price indices (P) are denominaed in US dollars. The MSCI indices for differen markes are compued using he same consisen formula which is value weighed. The rae of reurns ln(p /P - ) calculaed from he MSCI price indices which consiss of boh capial gain and income gain. [Table I abou here] Table I presens he descripive saisics of he daa, including sample means, medians, maximums, minimums, sandard deviaions, skewness, kurosis as well as he Jarque-Bera saisics and p-values. The highes mean reurn is per cen in Hong Kong and he US while he lowes is per cen in Japan. The sandard deviaions range from 0.04 per cen in he US (he leas volaile) o 0.45 per cen in are Indonesia (he mos volaile). The sandard deviaions of sock reurns are lowes in developed economies (ha is, he US, he UK, Ausralia and Japan), and he mos volaile in Indonesia, Thailand, Taiwan and Korea. All monhly sock reurns, ln( P / P ), have excess kurosis, which means ha hey have a hicker ail and a higher peak han a normal disribuion. The calculaed Jarque-Bera saisics and corresponding p-values are used o es for he normaliy assumpion. Based on he Jarque-Bera saisics and p-values, his assumpion is rejeced a any convenional level of significance for all sock reurns, wih he only hree excepions being he monhly sock reurns in Ausralia, Japan and he UK. 4. Empirical resuls As menioned earlier, we firs used he ADF and PP ess o deermine he order of inegraion of he 2 sock prices sudied. The lowes value of he AIC was used o deermine he opimal lag lengh in he esimaion procedure. Based on he resuls of he uni roo ess presened in Table II, he ADF and PP ess rejec he random walk hypohesis for only he sock price index in Taiwan a he five and one per cen significance levels, respecively. However, for all oher counries, boh uni roo ess canno rejec he random walk hypohesis. We hus conclude ha he sock price indices in ou of he 2 counries are I(). [Table II abou here] In he second sage, we subjeced each variable o one srucural break. For each series, we hen carried ou he ZA es (model C) and repor he resuls in Table III, below. As menioned earlier, he ADF and PP es resuls reveal ha mos sock prices 6

9 examined in his paper followed a random walk; whereas he resuls of he ZA es show ha sock prices for hree counries (ha is, Indonesia, Korea and Malaysia) are now saionary. Despie allowing for one endogenous srucural break in he daa, he daa in he remaining nine counries sill conain a uni roo. The esimaed coefficiens µ and θ are saisically significan for all variables, excep for θ in he case of he Philippines sock prices. There was a leas one srucural break in he inercep during he sample period for all sock prices. The esimaed coefficiens for β and γ are also saisically significan in eigh and nine ou of 2 counries, respecively, implying he sock price series exhibis an upward or downward rend and a leas one srucural break in rend in hese counries exiss. The repored TBs in he second column of Table III were endogenously deermined by he ZA es. In addiion, Figure shows ln( P ) and ln( P / P ) (monhly reurn) for each of he 2 counries, as well as heir corresponding srucural breaks obained by he ZA es. I is no surprising ha he endogenously-deermined srucural breaks in hese sock prices occurred mosly in he Asian crisis period (see TBs for Thailand, Indonesia, Korea, Malaysia, Singapore, he UK and he US in Table III). [Table III and Figure abou here] Because he majoriy of he sock price indices are non-saionary, we conduced he Engle-Granger coinegraion es. Table IV shows he resuls of his es for all 2 counries. The resuls show ha he null hypohesis of no coinegraion canno be rejeced for all pair-wise cases. In order o make robus conclusions, we also conduced he GH es, and he resuls are presened in Table V. Similar o he Engle-Granger es resuls, we found ha he Thai sock price index is no coinegraed wih he sock prices of any oher of he counries in our sample. This means ha here is no pair-wise long-run relaionship beween he sock prices in Thailand and is rading parners. Imporanly, according o Table V, he srucural break in he coinegraing vecor for mos counries occurred in 998 (he year afer he 997 Asian financial crisis). However, he coinegraion es resuls remain robus even afer capuring he srucural breaks in coinegraing vecors. [Tables IV and V abou here] In sum, similar resuls emerged from applying boh he Engle-Granger es and he GH (996) es o he daa, suggesing ha he Thai sock marke is no coinegraed pair-wise wih he sock markes of any of hese counries: Ausralia, Hong Kong, Indonesia, Japan, Korea, Malaysia, he Philippines, Singapore, Taiwan, he UK and he US. Our resuls are also consisen wih he previous findings of no coinegraion beween he Thai sock marke and some regional sock markes, including hose of Souh-Eas Asia (Ng, 2002) and he Pacific Basin (Chang, 200; Climen and Meneu, 2003). Finally, in he absence of long-run relaionships beween he sock prices of Thailand and is major rading parners, we hen used he Granger causaliy es o examine he pair-wise shor-run ineracions beween differen sock markes. Table VI presens he resuls of he Granger causaliy ess. The Wald F-saisics are calculaed o es he null hypoheses oulined in he previous secion. According o he resuls presened in Table VI, in he shor erm here is a unidirecional Granger causaliy running from he sock reurns of Hong Kong, he Philippines and he UK o ha of Thailand. On he oher hand, here is a unidirecional Granger causaliy from Thailand s sock reurn o he sock reurns of Indonesia and he US. Summers (2000) argues ha a financial crisis in one counry, however big or small, can adversely and psychologically 7

10 affec invesors percepions and expecaions in oher counries. Invesors reacions o acue marke shocks when coincided wih unwise governmen policy responses can influence he oher markes. For example he Asian crisis influenced he oher sock markes in he world (including he US marke) as invesors sared panicking ha he financial downurn could also engulf heir marke due o knock-on effecs across inernaional markes. This could parially explain why he sock marke reurn in such a small counry such as Thailand Granger causes he reurn in he US marke. We also found a bidirecional Granger causaliy beween he marke sock reurns in Thailand and is hree neighbouring counries (ha is, Malaysia, Singapore and Taiwan). Therefore, he shor-run movemens of sock reurns in hese hree counries can influence he performance of Thailand s sock marke. I can also be concluded ha any shor-run variaion of he sock reurns in Thailand can affec he marke reurns of is hree neighboring counries, and vice versa. Hence, in order o avoid financial conagion and fuure crises similar o he one which occurred in 997, cenral bankers and individual invesors mus keep abreas of new developmens in inernaional sock markes paricularly hose for which we found he evidence of bidirecional and unidirecional causaliy. [Table VI abou here] 5. Conclusions This sudy examines he long-run and shor-run relaionships beween he sock prices of Thailand and is major rading parners (Ausralia, Hong Kong, Indonesia, Japan, Korea, Malaysia, he Philippines, Singapore, Taiwan, he UK and he US), using monhly daa for he period December 987 o December In addiion o he Engle-Granger wo-sep procedure, we used he Gregory and Hansen (996) es, which allows for a srucural break in he coinegraion vecor. Based on he coinegraion resuls, we found no evidence of long-run relaionships beween he sock price indices of Thailand and is major rading parners. The policy implicaion of his finding for inernaional invesors is quie sraighforward: in he long run, here are poenial gains (for example, reduced sysemaic risks) which can be leveraged by asue invesors hrough porfolio diversificaion across differen inernaional markes. Second, in erms of shor-run movemens of inernaional sock marke reurns, we found hree pair-wise unidirecional Granger causaliies, whereby he reurns in Hong Kong, he Philippines and he UK can Granger cause he reurn in Thailand. Based on hese resuls, he performance of sock markes in Honk Kong, he Philippines and he UK may have a direc bearing on he Thai sock marke. However, here were also wo unidirecional Granger causaliies running from Thailand o Indonesia and he US. Thus any abnormal movemen in Thailand s sock reurns could lead o similar changes in Indonesia and he US. Third, we found evidence of a bidirecional Granger causaliy beween he sock reurns in Thailand and hose of hree of is neighbouring counries (ha is, Malaysia, Singapore and Taiwan). The repored causaliy es resuls are useful for any assessmen of he Asian sock markes. For example, he inerplay beween hese hree pairs of counries (Thailand Malaysia, Thailand Singapore and Thailand Taiwan) can be useful for cenral bankers and inernaional invesors alike in evaluaing sock marke performance. The empirical resuls presened in his paper suppor he view ha inernaional invesors have long-run opporuniies for porfolio diversificaion by acquiring socks from hese eleven counries. However, in he shor-run he scope of hese opporuniies 8

11 is raher limied due o sysemaic and ransiory flucuaions which are inheren o sock markes as evidenced by he causaliy es resuls. 9

12 References Ahlgren, N. and Anell, J. (2002), "Tesing for coinegraion beween inernaional sock prices", Applied Financial Economics, Vol. 2 No. 2, pp Barro, R.J. (200), Economic growh in Eas Asia before and afer he financial crisis, Working Papers No. 8330, Naional Bureau of Economic Research, Cambridge, MA. Chan, K.C., Gup, B.E. and Pan, M.-S. (997), "Inernaional sock marke efficiency and inegraion: A sudy of eigheen naions", Journal of Business Finance and Accouning, Vol. 24 No. 6, pp Chang, T. (200), "Are here any long-run benefis from inernaional equiy diversificaion for Taiwan invesors diversifying in he equiy markes of is major rading parners, Hong Kong, Japan, Souh Korea, Thailand and he USA", Applied Economics Leers, Vol. 8 No. 7, pp Chaudhuri, K. (997), "Coinegraion, error correcion and Granger causaliy: An applicaion wih Lain American sock markes", Applied Economics Leers, Vol. 4 No. 8, pp Chaudhuri, K. and Wu, Y. (2003), "Random walk versus breaking rend in sock prices: Evidence from emerging markes", Journal of Banking and Finance, Vol. 27 No. 4, pp Choudhry, T. (996), "Inerdependence of sock markes: Evidence from Europe during he 920s and 930s", Applied Financial Economics, Vol. 6 No. 3, pp Climen, F. and Meneu, V. (2003), "Has 997 Asian crisis increased informaion flows beween inernaional markes", Inernaional Review of Economics and Finance, Vol. 2 No., pp Engle, R.F. and Granger, C.W.J. (987), "Coinegraion and error correcion: Represenaion, esimaion and esing", Economerica, Vol. 55 No. 2, pp Fraser, P. and Power, D. (997), "Sock reurn volailiy and informaion: An empirical analysis of Pacific Rim, UK and US equiy markes", Applied Financial Economics, Vol. 7 No. 3, pp Frazscher, M. (2002), "Financial marke inegraion in Europe: On he effecs of EMU on sock markes", Inernaional Journal of Finance and Economics, Vol. 7 No. 3, pp Granger, C.W.J. (969), "Invesigaing causal relaions by economeric models and cross-specral mehods", Economerica, Vol. 37 No. 3, pp Gregory, A.W. and Hansen, B.E. (996), "Residual-based ess for coinegraion in models wih regime shifs", Journal of Economerics, Vol. 70 No., pp Hamori, S. and Imamura, Y. (2000), "Inernaional ransmission of sock prices among G7 counries: LA-VAR approach", Applied Economics Leers, Vol. 7 No. 9, pp Ibrahim, M.H. and Aziz, H. (2003), "Macroeconomic variables and he Malaysian equiy marke: A view hrough rolling subsamples", Journal of Economic Sudies, Vol. 30 No., pp Kanas, A. (998a), "Linkages beween he US and European equiy markes: Furher evidence from coinegraion ess", Applied Financial Economics, Vol. 8 No. 6, pp Kanas, A. (998b), "Volailiy spillovers across equiy markes: European evidence", Applied Financial Economics, Vol. 8 No. 3, pp

13 Kasa, K. (992), "Common sochasic rends in inernaional sock markes", Journal of Moneary Economics, Vol. 29 No., pp MacKinnon, J.G. (99), "Criical values for coinegraion ess", in Engle, R.F. and Granger, C.W.J. (Eds.), Long-run economic relaionships: Readings in coinegraion, Oxford Universiy Press, Oxford, pp Masih, A.M.M. and Masih, R. (999), "Are Asian sock marke flucuaions due mainly o inra-regional conagion effecs? Evidence based on Asian emerging sock markes", Pacific-Basin Finance Journal, Vol. 7 No. 3-4, pp Narayan, P.K. and Smyh, R. (2005), "Are OECD sock prices characerized by a random walk? Evidence from sequenial rend break and panel daa models", Applied Financial Economics, Vol. 5 No. 8, pp Ng, T.H. (2002), "Sock marke linkages in Souh-Eas Asia", Asian Economic Journal, Vol. 6 No. 4, pp Paev, P., Kanaryan, N. and Lyroudi, K. (2006), "Sock marke crises and porfolio diversificaion in Cenral and Easern Europe", Managerial Finance, Vol. 32 No. 5, pp Perron, P. (989), "The grea crash, he oil price shock and he uni roo hypohesis", Economerica, Vol. 57 No. 6, pp Phylakis, K. and Ravazzolo, F. (2002), "Measuring financial and economic inegraion wih equiy prices in emerging markes", Journal of Inernaional Money and Finance, Vol. 2 No. 6, pp Phylakis, K. and Ravazzolo, F. (2005), "Sock marke linkages in emerging markes: Implicaions for inernaional porfolio diversificaion", Journal of Inernaional Financial Markes, Insiuions and Money, Vol. 5 No. 2, pp Richards, A.J. (995), "Comovemens in naional sock marke reurns: Evidence of predicabiliy bu no coinegraion", Journal of Moneary Economics, Vol. 36 No. 3, pp Sharma, S.C. and Wongbangpo, P. (2002), "Long-erm rends and cycles in ASEAN sock markes", Review of Financial Economics, Vol. No. 4, pp Sandard and Poor's (2005), Global sock markes facbook, Sandard and Poor's, New York. Summers, L.H. (2000), "Inernaional financial crises: Causes, prevenion and cures", American Economic Review, Vol. 90 No. 2, pp. -6. Susmel, R. and Engle, R.F. (994), "Hourly volailiy spillovers beween inernaional equiy markes", Journal of Inernaional Money and Finance, Vol. 3 No., pp Syriopoulos, T. (2004), "Inernaional porfolio diversificaion o Cenral European sock markes", Applied Financial Economics, Vol. 4 No. 7, pp Worhingon, A.C., Kasuura, M. and Higgs, H. (2003), "Price linkages in Asian equiy markes: Evidence bordering he Asian economic, currency and financial crises", Asia-Pacific Financial Markes, Vol. 0 No., pp Yang, J., Kolari, J.W. and Min, I. (2003), "Sock marke inegraion and financial crises: The case of Asia", Applied Financial Economics, Vol. 3 No. 7, pp Zivo, E. and Andrews, D.W.K. (992), "Furher evidence on he Grea Crash, he oilprice shock and he uni-roo hypohesis", Journal of Business and Economic Saisics, Vol. 0 No. 3, pp

14 Table I. Descripions of he daa (sock reurn) employed, December 987-December 2005 Variable Mean Median Maximum Minimum Sandard deviaion Skewness Kurosis Jarque-Bera p-value P AU P HK P IN P JA P KO P MA P PH P SG P TA P UK P US P Source: Morgan Sanley Capial Inernaional, hp:// 2

15 Variable Table II. Uni roo es resuls y = µ + β+ α y + c y + ε i i k i= ADF es Consan and Opimal lag rend PP es Consan and Bandwidh rend ln P *** *** 7 P ln P AU AU *** *** 2 P ln P HK HK *** *** P ln P IN IN *** *** 3 P ln P JA JA -4.5 *** *** P ln P KO KO *** *** 4 P ln P MA MA ** *** 0 P ln P PH PH *** *** 3 P ln P SG SG *** *** P ln P TA ** *** 5 TA *** *** 2 P ln P UK UK *** *** 9 P ln P US US *** *** 3 P Noes: a) ** and *** indicae ha he corresponding null hypohesis is rejeced a he 5 and per cen significance levels, respecively. b) Criical values a he 5 and per cen are and -4.00, respecively (MacKinnon, 99). 3

16 Table III. The Zivo and Andrews es resuls: Break in boh he inercep and rend y = µ + β+ θ DU + γ DT + α y + c y + ε i i Variable TB µ β θ γ α k Inference ln P 996:0 (3.788) *** (.339) (-3.659) *** (-0.07) (-3.574) 2 Random walk ln P AU 200:02 (3.667) *** (3.240) *** (-2.955) *** (3.724) *** (-3.65) 0 Random walk ln P HK 993:0 (4.090) *** (2.478) ** (2.320) ** (-2.455) ** (-4.28) Random walk ln P IN 997:08 (5.765) *** (0.708) (-4.835) *** (.206) (-5.695) *** 8 Saionary ln P JA 2002:06 (4.069) *** (-2.227) ** (-2.565) ** (2.990) *** (-4.089) 9 Random walk ln P KO 997:09 (5.425) *** (-0.530) (-3.906) *** (4.267) *** (-5.444) ** 9 Saionary ln P MA 997:07 (6.774) *** (5.095) *** (-6.2) *** (-2.492) ** (-6.79) *** 9 Saionary ln P PH 993:07 (3.426) *** (.237) (.892) (-2.63) ** (-3.468) 2 Random walk ln P SG 997:03 (3.78) *** (2.976) *** (-3.08) *** (-2.089) ** (-3.74) 7 Random walk ln P TA 993:0 (4.09) *** (-2.045) ** (2.844) *** (.570) (-4.02) 9 Random walk ln P UK 996:08 (3.076) *** (2.06) ** (2.32) ** (-2.48) ** (-3.08) 2 Random walk ln P US 996:09 (3.407) *** (2.568) ** (2.657) *** (-2.76) *** (-3.338) 7 Random walk Noes: a) ** and *** indicae ha he corresponding null hypohesis is rejeced a he 5 and per cen significance levels, respecively. b) Criical values for α a he 5 and per cen levels are and -5.57, respecively (Zivo and Andrews, 992). k i= 4

17 Figure. Plo of he inernaional sock price indices and marke reurns Reurn of Ln() 7 Reurn of AU Ln(AU) 6.0 Reurn of HK Ln(HK) 6.5 Reurn of IN Ln(IN) Ln() Reurn of Ln(AU) Reurn of AU Ln(HK) Reurn of HK Ln(IN) Reurn of IN Reurn of JA Ln(JA) 5.2 Reurn of KO Ln(KO) 6.0 Reurn of MA Ln(MA) 6.5 Reurn of PH Ln(PH) Ln(JA) Reurn of JA Ln(KO) Reurn of KO Ln(MA) Reurn of MA Ln(PH) Reurn of PH Reurn of SG Ln(SG) 6.4 Reurn of TA Ln(TA) 6.4 Reurn of UK Ln(UK) 6.0 Reurn of US Ln(US) Ln(SG) Reurn of SG Ln(TA) Reurn of TA Ln(UK) Reurn of UK Ln(US) Reurn of US Source: Morgan Sanley Capial Inernaional, hp:// Noe: The verical line shows he ime of he srucural break obained by he ZA (992) mehod. 5

18 Table IV. The Engle-Granger wo-sep es resuls -saisics ADF es on ε ˆ (equaion 3) a ˆ η coefficien (equaion 4) Thailand-Ausralia -2.65(0) Thailand-Hong Kong -2.42(2) Thailand-Indonesia (0) Thailand-Japan (0) Thailand-Korea -2.7(0) -2.90* Thailand-Malaysia (2) 0.09 Thailand-Philippines -2.30(2) -.60 Thailand-Singapore -.297(2) Thailand-Taiwan (2) Thailand-UK (2) * Thailand-US (2) * Noes: a) We do no rejec he null (i.e. a uni roo in ˆ ε ) a he 5 per cen level or beer as he criical values a he 5 and per cen are and -4.00, respecively (MacKinnon, 99). b) Figures in parenheses are he opimal lag lengh deermined by he AIC. 6

19 Table V. The Gregory and Hansen es resuls Model C: y = µ + θ DU + µ x + ε 0 Model C/T: y = µ + θ DU + β + µ x + ε 0 Model C/S: y = µ + θ DU + β + µ x + µ x DU + ε 0 2 Model TB ADF * k Thailand-Ausralia C 998: C/T 998: C/S 998: Thailand-Hong Kong C 998: C/T 2002: C/S 998: Thailand-Indonesia C 99: C/T 997: C/S 99: Thailand-Japan C 998: C/T 998: C/S 998: Thailand-Korea C 998: C/T 998: C/S 998: Thailand-Malaysia C 998: C/T 2003: C/S 994: Thailand-Philippines C 995: C/T 200: C/S 998: Thailand-Singapore C 996: C/T 2002: C/S 996: Thailand-Taiwan C 998: C/T 998: C/S 998: Thailand-UK C 998: C/T 998: C/S 998: Thailand-US C 992: C/T 998: C/S 996: Criical values 5 per cen per cen C C/T C/S Noe: Given he repored criical values (GH, 996), he null is no rejeced a he 5 and per cen levels of significance for any pair of counries. 7

20 Table VI. The Granger causaliy es resuls k k 2 y = φ+ λ x + λ x + δ y + ηecm + v 0 i i i i i= i= k k 2 x = φ + λ y + λ y + δ x + η ECM + v 0 i i i i Inference i= i= Null hypohesis H : λ = λ =... = λ = 0 o 2 k or H : λ = λ =... = λ = 0 o 2 k F-saisic Probabiliy No causaliy P AU P No causaliy P P AU HK Unidirecional causaliy P P 7.03 *** No causaliy P P HK No causaliy P IN P IN Unidirecional causaliy P P *** 0.00 No causaliy P JA P No causaliy P P JA No causaliy P KO P No causaliy P P KO Bidirecional causaliy MA P P.870 ** MA P P MA P P 3.77 *** PH Unidirecional causaliy P P.936 ** No causaliy P P PH Bidirecional causaliy SG P P * SG P P SG P P * 0.05 Bidirecional causaliy TA P P ** 0.0 TA P P TA P P.798 * UK Unidirecional causaliy P P *** No causaliy P P UK No causaliy P US P US Unidirecional causaliy P P ** Noe: *, ** and *** indicae ha he corresponding null hypohesis is rejeced a he 0, 5 and per cen significance levels, respecively. 8