Investigating Causal Linkages between International Stock Markets in Hungary and Austria in Terms of Economic Globalization

Transcription

1 Invesigaing Causal Linkages beween Inernaional Sock Markes in Hungary and Ausria in Ters of Econoic Globalizaion Jain Trivedi * and Raona Birău ** E-ail: conac.jain@gail.co; birauraona@yahoo.co ABSTRACT The ain objecive of his aricle is o invesigae causal linkages beween inernaional sock arkes in Hungary and Ausria in ers of econoic globalizaion. We consider daa fro January 2 o Deceber, 213. AT index represens Ausria index where as BU represens Hungary. We noiced ha Hungary financial arkes are coparaively ore volaile and provides coparaively ineresing opporuniies for reurns. There are srong evidences of no casual linkages of Ausria arkes (AT) wih Hungary arke, boh sides. None of he arke excluded fro global financial crisis. However he recovery scales are coparaively found higher in Hungary arke where as AT arke follows lower escalaion raes. We followed BDS and Granger casaliy ess. The resuls classified in coparaive anner. This paper will suppor decision akings on escalaion raios depending on he inernaional financial arke ransiing paerns. Keywords : Sock Marke Linkages, Spillover Effecs, Volailiy Clusers, Granger Causaliy, Risk Manageen, Porfolio diversificaion * Aiy School of Business, Aiy Universiy, Mubai, India ** Universiy of Craiova, Faculy of Econoics and Business Adinisraion, Craiova, Roania ISSN Prin 215 Sybiosis Cenre for Manageen Sudies, Pune Annual Research Journal of Sybiosis Cenre for Manageen Sudies, Pune Vol. 3, April 215, pp

2 Vol. 3, April 215 Annual Research Journal of SCMS, Pune 79 Inroducion Financial arke volailiy has been he subjec of greaer ineres for inernaional invesors, researchers and acadeicians. I has delivered pleny nuber of research in he areas of sock arke volailiy, ransiing paern, risk evaluaions, invesen opporuniy, inernaional linkages and so on. This paper focuses paricularly on he casual linkages beween he sock arke of Hungary (BU) and Ausria (AT). According o FTSE Counry Classificaion as a Sepeber 214 which is he os recen official repor, Ausria is included in he caegory of developed counries and Hungary is included in he caegory of advanced eerging counries. Ausria financial arke follows coparaive ore sable invesen opporuniy for he inernaional invesors all over he world. The risk raios and volailiy paerns are less escalaed wih inernaional financial arke oens. The Hungary arke (BU) classified as he advance eerging arkes which represens higher escalaion raes a upper side and lower side wih arke volailiy. The advance eerging arkes provides greener opporuniies for risk aker invesors. I is invesigaed fro previous sudies ha no only developed counries bu also financial arkes of developed and developing counries becoe inerrelaed (Akar, I. 29). Eun and Shi (1989) have provided ineresing resuls regarding he inernaional ransission of sock arke oveens aong several aure arkes, such as: Ausralia, Japan, Hong Kong, U.K, Swizerland, France, Gerany, Canada and U.S.A., considering he fac ha a series of ulilaeral inerconnecions were idenified. Panon, Lessig, and Joy (1976) invesigaed co-oveens of inernaional equiy arkes in he ligh of invesen opporuniies arising fro porofolio diversificaions. There are vas nuber of research papers on financial arke volailies linkages and provided he greaer suppor o invesors in decision akings. This paper basically ephasized on he inernaional financial arke volailiy linkages on advance eerging arke and developed arke. This paper will suppor decision akings on escalaion raios depending on he inernaional financial arke ransiing paerns. For insance Tokyo and New York ajor sock indices, naely Nikkei 225 and S&P5. Kasa (1992) invesigaed coon sochasic rends in inernaional sock arkes. J. Trivedi & R. Birau (213) invesigaed

3 8 Annual Research Journal of SCMS, Pune Vol. 3, April 215 he disinguishing characerisic is sabiliy of developed capial arke and sable eerging arke. Those groups of capial arke says in he paricular bracke have spreading ipac of volailiy (bullish and bearish) refleced fro sable and developed capial arke. The ipac spreads hrough iner-linkage beween developed and eerging arkes. These findings can be idle o bridging he paern gap and ipac on volailiy. Mehodological Approach and Epirical Resuls The epirical analysis is based on he daily reurns of he ajor sock indices during he saple period beween January 2 and Deceber 213. The coninuously-copounded daily reurns are calculaed using he log-difference of he closing prices of sock arkes seleced indices, ie AT Index (Ausria) and BU Index (Hungary), as follows: p r = ln = ln ( p) ln ( p 1 ) p 1 In he above forula, p represens he daily closing price. Daa series consiss of he daily closing prices for each saple sock index during he period beween January 2 and Deceber 213 wih he excepion of legal holidays or oher evens when sock arkes have no perfored any financial ransacions. Augened Dickey-Fuller (ADF) es is used in order o deerine he non-saionariy or he inegraion order of a financial ie series. A series noed y is inegraed of order one, i.e. y ~ I ( 1) and conains a uni roo if y is non-saionary, bu on he oher hand y is saionary, i.e. y = y y 1. Moreover, exrapolaing he previous expression, a series y is inegraed of order d, i.e. y ~ I ( d ) if y is non-saionary, bu d y is saionary. The ADF diagnosic es invesigaes he poenial presence of uni roos divided ino he following caegories: uni roo wih a consan and a rend, uni roo wih a consan, bu wihou a ie rend, and finally uni roo wihou consan and eporal rend. The ADF es is based on he following regression odel: y = c + β + d y p 1 + γ i y i + ε i= 1 where p represens he nuber of lags for which i was invesigaed wheher fulfilling he condiion ha residuals are whie noise, c is a

4 Vol. 3, April 215 Annual Research Journal of SCMS, Pune 81 consan, is he indicaor for ie rend and Δ is he sybol for differencing. In addiion, i is iporan o ephasize he essence of a sochasic rend ha can no be prediced due o he ie dependence of residual s variance. Sricly relaed o he ADF es, if he coefficiens o be esiaed β and d have he null value hen he analyzed financial ie series is characerized by a sochasic rend. The null hypohesis, naely if he ie series has a uni roo, is rejeced if -saisics is lower han he criical value. We followed basic saisical characerisics of seleced indices are represened by he following issues: Jarque-Bera es s saisic which allows o eliinae he noraliy of disribuion hypohesis, paraeer of asyery disribuion or Skewness and Kurosis paraeer which easures he peakedness or flaness of he disribuion, ie lepokuric disribuion. The BDS es was used in order o deerine wheher he residuals are independen and idenically disribued. BDS es is a wo-ailed es and is based on he following hypohesis: H : saple observaions are independenly and idenically disribued (I.I.D.) H 1 : saple observaions are no I.I.D. This includes aspec involving ha he ie series is non-linearly dependen if firs differences of he naural logarih have been calculaed. The BDS saisics converges in disribuion o N(,1) hus he null hypohesis of independen and idenically disribued is rejeced based on a resul such as V, ε > 1,96 in ers of a 5% significance level. The null hypohesis was rejeced in boh cases based on seleced sock indices. Granger (1969) suggesed ha, if soe oher ie series Y conains inforaion regarding he pas periods which are useful in he predicion of and in addiion his inforaion are included in no oher series used in he predicor, hen his iplies ha Y caused. Moreover, Granger suggesed ha if and Y are wo differen saionary ie series variables wih zero eans, hen he canonical causal odel has he following for: Y = = a j j + b jy j + j= 1 j= 1 c j j + d jy j + j= 1 j= 1 ε η

5 82 Annual Research Journal of SCMS, Pune Vol. 3, April 215 where ε and η play he role of wo uncorrelaed whie-noise series, naely: E[ ε ε ] = = E[ η η ] for s and siulaneously: E[ ε ε ] = for s,. s s Pracically, he very idea of causaliy requires ha in he case when Y is causing soe b j is differen fro zero and vice versa, i.e. in he case when is causing Y soe c j is differen fro zero. A differen siuaion iplies ha causaliy is valid siulaneously in boh direcions or siply a so-called feedback relaionship beween and Y. The F-disribuion es is used o es he Granger causaliy hypoheses based on he following forula: F = ( R UR) / RSS / ( n k ) RSS RSS UR where RSS R is he residual su of squares, RSS UR represens AT CLOSING he PRICE unresriced 6 residual su of squares, is he nuber of lagged variables, K is 5 he nuber of paraeers in he resriced 4 regression. According o 3 represenaion heore, he null hypohesis H o iplies ha lagged 2 ers do no belong in he regression. The null hypohesis is rejeced if 1 he F-value exceeds he criical F value a he seleced level of significance (5%) or if he P-value is lower han he α level of significance. s 6 AT CLOSING PRICE 3 BU INDE CLOSING PRICE Source: 25 Auhor s copuaion using financial series of AT and BU sock indices. 2 The hisorical daa series represens he financial indices fro Jan 2 o 15 Dec 213. Ausria (AT) index reurns represens he developed counry 1 and Hungary (BU) represens advance eerging arke. We can noice ha fro he begininning of he sudy period here are coparaively Figure 1: The Trend of AT Index (Ausria) and BU Index (Hungary) BU INDE CLOSING PRICE Individual Graphics ore ups and down skeches in he advance eerging arke coparaed o he developed arke. See saionary graph for ore cleriy.

6 Vol. 3, April 215 Annual Research Journal of SCMS, Pune 83 (see Fig. 2). Eerging arkes and advance eerging arkes are always ore volailine copared o he developed arkes. The ransiing paern changes are clearly visible wih higher escalaion raes and wih observaion we can find ha advance eerging arkes follows he developed arke wih higher degree of escalaion raes for boh sides. I also increases he risk facor for he invesors and offers exciing opporuniies for he invesors and researchers in daily based sock rading..12 AT LOG RETURNS BU INDE LOG RETURNS Figure 2: The Log-reurns of AT Index (Ausria) and BU Index (Hungary) Source: Auhor s copuaion using financial series of AT and BU sock indices. The basic sock saisics includes 3524 observaions for Ausria arke and Hungary arke. The log reurns and hisogra chas suggess higher degree of volailiy and changes of sock prices a higher sides in advance eerging arke during he coparaive sudy (see Fig 3). I also increases he degree of sandard deviaions and in o ax raes. We can see ha Skewness is higher in AT log reurns where as Kurosis is lower in BU log reurns. I eans ha sock oens are aking ore sronger ipac on sock prices copared o he developed arke of AT.

7 84 Annual Research Journal of SCMS, Pune Vol. 3, April Series: AT_LOG_RETURNS Saple 3/1/2 31/12/213 Observaions 3524 Mean Median Maxiu Miniu Sd. Dev Skewness Kurosis Jarque-Bera Probabiliy. 1 8 Series: BU_INDE_LOG_RETURNS Saple 3/1/2 31/12/213 Observaions Mean Median Maxiu Miniu Sd. Dev Skewness Kurosis Jarque-Bera Probabiliy. Figure 3: AT and BU Log reurns Hisogras OBS 3524 Source: Auhor s copuaion using financial series of AT and BU sock indices. Table 1: Augened Dickey-Fuller (ADF) Tes Null Hypohesis: AT_LOG_RETURNS has a uni roo -Saisic Prob.* Augened Dickey-Fuller es saisic Tes criical values: 1% level % level % level Null Hypohesis: BU_INDE_LOG_RETURNS has a uni roo -Saisic Prob.* Augened Dickey-Fuller es saisic Tes criical values: 1% level % level % level Source: Auhor s copuaion using financial series of AT and BU sock indices.

8 Vol. 3, April 215 Annual Research Journal of SCMS, Pune 85 The Augened Dickey-fuller es resuls are significan for Ausria (AT) and Hungary (BU) (see Table 1). Table 2: BDS Tes for AT and BU Indices BDS Tes for AT_LOG_RETURNS Saple: 3/1/2 31/12/213 Diension BDS Saisic Sd. Error z-saisic Prob BDS Tes for BU_INDE_LOG_RETURNS Saple: 3/1/2 31/12/213 Diension BDS Saisic Sd. Error z-saisic Prob Source: Auhor s copuaion using financial series of AT and BU sock indices. The BDS ess resuls suggess independen and idenifyable disribuions of Ausria sock arke and Hungary sock arke. I represens ha ie series is non-linearly dependen in case of he firs differences of he naural logarih been calculaed. In Table 2, i rejecs he disribuions of n(,1) and hus he null hypoheses of independen and idenically disribuion is rejeced for Ausria (AU) arke and Hungary (BU) arke reurns. I eans ha he saisical disribuion of BDS ess arrives o resul such as V, ε > 1, 96 in ers of a 5% significance level. The null hypohesis was rejeced in boh cases based on seleced sock indices of AU and BU fro year Jan 2 o Dec 213.

9 86 Annual Research Journal of SCMS, Pune Vol. 3, April 215 BDS es resuls has idenified and varified ha here are no independen 12 and idenifyable relaionship beween he develop arke and advance 8 eerging arke. However he ransiing paern sees siiler because 4 of inernaional ransiing paern linkage and no evidence found for independen casual linkage. We now follow Granger casualiy ess o -4 check on resul 1. We disclosed he heoreical quanile es resuls for -8 AU and BU arke visible in Fig Theoreical Quanile-Quaniles AT LOG RETURNS Theoreical Quanile-Quaniies Exree Value Quanile Theoreical Quanile-Quaniles Exree Value Quanile Exree Value Quanile AT LOG RETURNS BU INDE LOG RETURNS Figure 12 4: Theoreical Quanile Tess for AU and BU Sock Indices (Exree values) 8 Source: Auhor s 4 copuaion using financial series of AT and BU sock indices. Exree Value Quanile -4-8 Pairwise Granger Causaliy Tess Saple: 3/1/2 31/12/213 Table 3: Granger Causaliy Tess BU INDE LOG RETURNS Null Hypohesis Obs F-Saisic Probabiliy BU_INDE_LOG_RETURNS does no Granger Cause AT_LOG_RETURNS AT_LOG_RETURNS does no Granger Cause BU_INDE_LOG_RETURNS Source: Auhor s copuaion using financial series of AT and BU sock indices. As we have undersood and learned in ehodology chaper abou he evaluaion and analysis of Granger casualiy ess, his ess srongly idenifies he casual linkages where (if) Y conains inforaion regarding he pas periods which are useful in he predicion of, in such case Y caused. Moreover, Granger suggesed ha if and Y are wo differen saionary ie series variables wih zero eans, hen he canonical causal odel has he following for only if Y caused.

10 Vol. 3, April 215 Annual Research Journal of SCMS, Pune 87 Y = = a j j + b jy j + j= 1 j= 1 c j j + d jy j + j= 1 j= 1 In Table 3, we copued Granger casualiy ess and we arrieve o conclude ha he sudy daa series of AU and BU arkes are no being followed by he above enioed for. The financial ie series follows he feedback disribuion fors since he F value exceeds he criical F value a he seleced level of significance, i.e. 5% and in alernae if he P value is lower han he a level of significance. I proves ha here is no casual linkage or significance beween he developed financial series AU (Ausria) and BU (Hungary). Conclusions This paper covers he epirical sudy based on casual linkages beween developed specien sock arke (AU) and eerging specien sock arke (BU). Econoic globalizaion can be defined as a dynaic process of growh and dependency links beween naional saes wih coplex long-er iplicaions. Ausria and Hungary are neighboring counries wih a significan coon hisory and boh are European Union eber saes. However, he epirical resuls of Granger causaliy ess beween inernaional sock arkes in Hungary and Ausria suggess he absence of a causal relaionship. According o he ehodology, he null hypohesis is rejeced if he F-value exceeds he criical F value a he seleced level of significance (5%) or if he P-value is lower han he α level of significance, so here is no paricular causaliy beween Hungary and Ausria, in he period beween January 2 and Deceber 213. In oher words, he null hypohesis of Granger causaliy is no rejeced, so here is no causal relaionship beween seleced sock arkes. Neverheless he financial series paerns sees o relevan and siilar reasonwih inernaional ransiing paerns of financial arkes. ε η

11 88 Annual Research Journal of SCMS, Pune Vol. 3, April 215 References Abianyu, Y., e al., 28, Inernaional Linkages o he Indonesian Capial Marke: Coinegraion Tes, Jakara, Capial Marke and Financial Insiuion Supervisory Agency, Minisry of Finance of Indonesia. Balios, D., anhakis, M., 23, Inernaional inerdependence and dinaic linkages beween developed sock arkes, Souh Easern Journal of Econoics, pp Brock, W.A., W.D. Decher and J.A. Scheinkan, 1987, A Tes for Independence Based on he Correlaion Diension, Deparen of Econoics, Universiy of Wisconsin a Madison, Universiy of Houson, and Universiy of Chicago. Dickey, D.A., Fuller, W.A., 1981, Likelihood Raio Saisics for Auoregressive Tie Series wih a Uni Roo, Econoerica, pp Engle R.F., Granger C.W.J., 1987, Coinegraion and Error Correcion: Represenaion, Esiaion and Tesing, Econoerica, 55, pp Eun, C.S., Shi, S., 1989, Inernaional Transission of Sock Marke Moveens, Journal of Financial and Quaniaive Analysis, pp Granger, C. W. J., 1969, Invesigaing Causal Relaions by Econoeric Models and Cross-specral Mehods, Econoerica 37(3): Khan, T.A., 211, Coinegraion of Inernaional Sock Markes: An Invesigaion of Diversificaion Opporuniies, Undergraduae Econoic Review, Volue 8, Issue 1. Phylakisa, K. and Ravazzolob, F., 25, Sock arke linkages in eerging arkes: Iplicaions for inernaional porfolio diversificaion, Elsevier, In. Fin. Markes, Ins. and Money 15, pp J. Trivedi. R. Birau 213, Invesingain inernaional ransiing paern of sock price volailiy. Advances in Accouning, Audiing and Risk Manageen, 213, pp