ISSN: Analyzing dynamic causal linkages between developed stock markets of Spain and Canada

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1 Inernaional Journal Of Core Engineering & Managemen(IJCEM) Analyzing dynamic causal linkages beween developed sock markes of Spain and Canada Felicia Ramona Birău, Ph.D. Regional Public Finances General Direcorae of Craiova, Romania Absrac The main objecive of his research aricle involves analyzing dynamic causal linkages beween developed sock markes of Spain and Canada. The long-run dynamic causal linkages beween inernaional sock markes highligh he imporance of a funcional and sable financial environmen. Seemingly insignifican srucural imbalances can easily generae dramaic consequences in he conex of a globalized and inegraed world wide perspecive. The empirical analysis is based on daily reurns of seleced developed sock markes major indices during he period beween June 1993 and December The financial economerics empirical research is based on Uni Roo Tes, Augmened Dickey-Fuller saionary es, BDS es and Granger causaliy es. The final resuls provide a comprehensive perspecive on inernaional porfolio diversificaion and risk managemen. Index Terms dynamic causal linkages, developed sock markes, inernaional porfolio diversificaion, risk managemen, Granger causaliy, financial invesmen process I. INTRODUCTION In he conex of globalizaion, he long-run dynamic causal linkages beween inernaional sock markes, such as Spain and Canada funcional and sable financial environmen emphasize he major relevance of a funcional and sable financial environmen. Moreover, according o FTSE Counry Classificaion issued on Sepember 2013 based on he laes official repor, Spain and Canada are included in he firs mos imporan caegory of counries, ie developed. Generally, here are he following four fundamenal caegories of counries : developed, advanced emerging, secondary emerging and fronier. If ranked by oal land area, Canada is he larges counry in Norh America and he second larges counry in he world. Canada have also he longes coaslines in he world wih he Pacific, Arcic and Alanic Oceans. On he oher hand, Spain is he second larges counry in Wesern Europe and have boh Alanic and Medierranean coaslines. According o he Embassy of Canada o Spain : Canada and Spain enjoy a close relaionship of acive cooperaion and he bilaeral relaions 1

2 Inernaional Journal Of Core Engineering & Managemen(IJCEM) beween he wo counries are increasingly dynamic, noably in he areas of educaion and business. I is also highlighed he imporance of dynamic regional relaionships beween Canada and Spain. II. METHODOLOGICAL APPROACH AND EMPIRICAL RESULTS The empirical analysis is based on daily sock reurns of seleced developed sock markes major indices during he period beween June 1993 and December The IBEX 35 index is a marke capializaion weighed index and i is also he benchmark sock marke index of he Bolsa de Madrid (Madrid Sock Exchange), ie he main sock exchange in Spain. The S&P TSX Composie Index is a capializaionweighed index designed in order o measure marke aciviy of he larges companies lised on he Torono Sock Exchange. The applied financial economerics research mehodology includes : Uni Roo Tes, Augmened Dickey-Fuller saionary es, BDS es and Granger causaliy es. The coninuously-compounded daily reurns are calculaed using he log-difference of he closing prices of sock markes seleced indices, ie IBEX 35 Index (Spain) and S&P TSX Composie Index (Canada), as follows : Fig. 1 : The rend of IBEX 35 Index (Spain) and S&P TSX Composie Index (Canada) - join graphic - r ln p p 1 ln p ln p 1 where p is he daily closing price. Daa series consiss of he daily closing prices for each sample sock index during he period beween June 1993 and December wih he excepion of legal holidays or oher evens when sock markes haven performed ransacions. 2

3 Inernaional Journal Of Core Engineering & Managemen(IJCEM) Fig. 2 : The rend of IBEX 35 Index (Spain) and S&P TSX Composie Index (Canada) - individual graphics - Fig. 3 : The log-reurns of IBEX 35 Index (Spain) and S&P TSX Composie Index (Canada) - join graphic - 3

4 Inernaional Journal Of Core Engineering & Managemen(IJCEM) peakedness or flaness of he disribuion or lepokuric disribuion. Fig.4 : The log-reurns of IBEX 35 Index (Spain) and S&P TSX Composie Index (Canada) - individual graphics - The basic saisical characerisics of seleced indices, ie IBEX 35 Index (Spain) and S&P TSX Composie Index (Canada) are analyzed based on he following : Jarque-Bera es s saisic whose imporance derives from he fac ha i allows o eliminae he normaliy of disribuion hypohesis, parameer of asymmery of disribuion or Skewness and Kurosis parameer which measures he Fig. 5 : Basic saisical characerisics of seleced indices 4

5 Inernaional Journal Of Core Engineering & Managemen(IJCEM) The empirical analysis also includes he use of Hodrick-Presco (HP) filer which is a specialized filer for rend and business cycle esimaion decomposing he series ino a rend componen and a residual componen, which may or may no include a cyclical componen. Fig. 6 : Hodrick Presco Filer 5

6 Inernaional Journal Of Core Engineering & Managemen(IJCEM) Fig. 7 : Asymmeric ime-varying filer Fig.8 : Theoreical Quanile-Quanile Plos (Exreme values) The Augmened Dickey-Fuller (ADF) es was 6

7 Inernaional Journal Of Core Engineering & Managemen(IJCEM) applied for he sample period in order o deermine he saionariy of he analyzed ime series. The null hypohesis suggess ha he analyzed ime series conains a uni roo and consequenly i is nonsaionary. Empirical analysis based on he logreurns of he seleced indices reflecs he fac ha es_adf< criic (1%, 5%, 10%) so he null hypohesis H 0 is rejeced and he analyzed ime series is saionary. Simulaneous, i is obain he following resul : Prob (0%) < es levels (1%, 5%, 10%) so he null hypohesis H 0 is rejeced and he analyzed ime series is saionary. Table 1: Augmened Dickey-Fuller Tes The BDS es was used in order o deermine wheher he residuals are independen and idenically disribued. The BDS saisics converges in disribuion o N(0,1) hus he null hypohesis of independen and idenically disribued is rejeced based on a resul such as V 1, 96 in erms of a 5% significance level. BDS es is a wo-ailed es and is based on he following hypohesis : H 0 : sample observaions are independenly and idenically disribued (I.I.D.) H 1 : sample observaions are no I.I.D., ie he financial ime series is non-linearly dependen if firs differences of he naural logarihm have been calculaed. The null hypohesis was rejeced in boh sample cases. m, Table 2 : BDS Tes 7

8 Inernaional Journal Of Core Engineering & Managemen(IJCEM) wo differen saionary ime series variables wih zero means, hen he canonical causal model has he following form : X Y m a X m j j j 1 j 1 m c X m j j j 1 j 1 b Y where ε and η play he role of wo uncorrelaed E whie-noise series, namely s 0 E s for s E 0 and on he oher hand s for, s. The assumpion of causaliy requires ha in he case when Y is causing X some b j is differen from zero and vice versa, ie in he case when X is causing Y some c j is differen from zero. A differen siuaion implies ha causaliy is valid simulaneously in boh direcions or feedback relaionship beween X and Y. According o Granger causaliy es, based on he Probabiliy values included in he ables below, empirical analysis provides significan informaion on dynamic causal linkages beween developed sock markes of Spain and Canada. Considering ha 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, financial crisis impac is even more significan. d j j Y j j According o Granger (1969), if some oher ime series Y conains informaions regarding he pas periods which are useful in he predicion X and in addiion his informaions are included in no oher series used in he predicor, hen his implies ha Y caused X. Granger suggesed ha if X and Y are 8

9 Inernaional Journal Of Core Engineering & Managemen(IJCEM) Table 3 : Granger Causaliy ess Canada highlighs significan invesmen opporuniies based on inernaional porfolio diversificaion and risk managemen. Granger causaliy runs simulaneously in boh direcions for Spain and Canada (feedback relaionship). Empirical analysis included he calculaion for boh lags=1 and lags=2, so he resuls are quie differen considering he behavior of causal relaionships. The impulse response under he sample period of ime is very relevan in he conex of globalizaion. IV. REFERENCES III. CONCLUSIONS 1. Granger C.W.J., Developmens in he Sudy of Coinegraed Economic Variables, Oxford Bullein of Economics and Saisics, 48, Granger, C., Morgensern, O., Predicabiliy of sock marke prices, MA: Lexingon, Heah Lexingon Books, Granger, C.W.J., Invesigaing Causal Relaions by Economeric Models and Cross-specral Mehods, Economerica 37 (3): , Gujarai, D.N., Basic Economerics, Fourh Ediion, Unied Saes Miliary Academy, Wes Poin, McGraw-Hill Higher Educaion, Harris, R. and R. Sollis, Applied Time Series Modelling and Forecasing, John Wiley&Sons, 2003 *** - hp:// This research aricle provides addiional empirical evidence regarding dynamic causal linkages beween inernaional developed sock markes such as Spain and Canada. The resuls of Granger causaliy ess among developed sock markes of Spain and 9