Inernaional Journal of Business and Social Science Vol. 5, No. 7(1); June 2014 An Economeric Analysis beween Commodiies and Financial Variables: The Case of Souheas Asia Counries Norasyiin Abdullah Fahami Faculy of Business Managemen MARA Universiy of Technology Malaysia SharazadHaris Faculy of Business Managemen MARA Universiy of Technology Malaysia Hasyeilla Abdul Mualib Faculy of Business Managemen MARA Universiy of Technology Malaysia Absrac This paper provides economeric analysis on he relaionship beween commodiies (crude oil and gold) and wo commodiy-relevan financial variables (exchange rae and he equiy index). The case sudy involves Souheas Asia counries which is Malaysia, Thailand and Indonesia. In his paper, world oil and gold prices are uilized, while exchange raes refer o naional currency agains U.S. Dollar. The leading soc index of each counry is used as a proxy for he soc mare. For ha reason, FBM KLCI of Malaysia, IDX Composie of Indonesia and SET Index of Thailand (SET Index) are analyzed. The resul confirms ha here are dynamic correlaions beween commodiies and financial variables among Souheas Asia counries. This paper also reveals he exisence of feedbac relaionship for soc index and exchange rae nexus. Thus, he implemenaion of he soc and exchange rae policies should be carefully execued as boh mares impac each oher. Keywords: correlaions, Granger causaliy, gold, oil, exchange rae, soc, index 1. Inroducion Oil and gold has been nown as he sraegic commodiies ha are vasly raded in he global economy. Augmened number of research done on hese wo commodiies of lae is signaling he excepional roles of he said commodiies owards he economy. I has been observed ha he flucuaion of he world price of oil and gold can be used as an indicaor, for example in he case of world oil price; a hie in oil price has a noaion ha i will affec he economic aciviies: See: (Arouri, Jouini and Nguyen, 2012; Basher, Haug and Sadorsy, 2012; He, Wang and Lai, 2010; Lizardo and Mollic, 2010; Rafiq, Salim and Bloch, 2009). Hisorically, soaring and/or violen flucuaion of price of his blac gold has an adverse impac on he growh of global economy and financial mare (He e al., 2010; Masih, Peer and De Mello, 2011) and inadverenly could rigger inflaion and recession. Bhar and Malliaris (2011) repored ha he oil price hie from 2004 o 2006 has slowed down he world economy. Global oil prices are rising a a fas rae maing i impossible for he economy o eep up wih i. This was due o he fac ha price hie in oil surge he cos of producion for corporaion hus lowering down heir profi margin. Acnowledgemen:The auhors wish o express graiude o he Research Managemen Insiue of MARA Universiy of Technology for funding suppor. 216
Cener for Promoing Ideas, USA www.ijbssne.com To minimize his, producs and goods were sold a a higher price and his has led o inflaion. Yahya, Hussin, Muhammad, Raza and Tha (2013) have also observed numerous oil price flucuaions and came o a conclusion ha an increase in he oil price level could ac as a rigger in slowing down economy while inflaion increases. Gold is considered as a leader in he precious meals mare which widely being used as an indusrial commodiy as well as good invesmen porfolio. While he price of crude oil is he mos volaile in he commodiy mare, gold on he oher hand has a value-preserving abiliy (Baur & McDermo, 2010). Their research which used samples spanning from he lae 70 s unil 2009 has esablished ha he price of gold has he abiliy o adap and o confirm o he changes in he inflaion rae, hus dub his precious meal as a safe haven during financial crises. While he highly sensiive segmens in he financial mares are equiy mare and foreign exchange mare. This is because boh mares will quicly be refleced if here is any changes in he relaed policy. For example, he exchange rae of a cerain currency is no fixed bu highly volaile and ha would bring an impac o a counry s growh rae. This is due o compeiiveness price of an impor/expor of an inpu and oupu depends on he flucuaion of exchange rae. To illusrae, le s consider currency appreciae, exporer will lose heir inernaional compeiiveness which consequenly brings he sales and profis down and also decline in he soc price. The opposie scenario will happen if currency depreciae. Researchers and academia have long before pu heir ineres o sudy variables relaed o finance and economic of a counry especially among developed counries. However, he ineres has been shifed o emerging and developing mares raher han developed mares alone. This migh be due o he rising in he economies of he so called underdog counries. Inernaional Finance Corporaion (IFC) has defined emerging mare as a soc mare ha is in ransiion, increasing in size, aciviy or level of sophisicaion. The erm emerging mare is applied o a counry maing an effor o change, and improve is economy o reach he same level of developed mare. And, mos of he Souheas Asia counries have been lised as he emerging economies. Thus, he specific objecive of his sudy is o examine he dynamic correlaions among wo highly inernaionally raded commodiies; oil and gold and wo commodiy-relevan financial variables; exchange rae and he equiy index among Souheas Asia counries. The res of his paper is divided ino four secions. The second secion briefs on he overview of previous lieraures; secion hree discusses on he research mehodology, followed by findings and analysis in secion four and secion five concludes he research. 2. Lieraure Review The sudy on he relaionship or ineracion among various economic indicaors has always been a major ineres of he researchers, policy maers and praciioners. However, recenly he sudy on he ineracion beween highly raded commodiy and oher financial indicaors has arisen. Wang, Wang and Huang (2010) who invesigae he relaionship beween prices of oil and gold, exchange rae and equiy mares of Taiwan, China, Japan, Unied Sae (US) and Germany found ha here exis long-run coinegraion among all variables in each counry excep for US. Empirically, he findings suppor ha here exis bidirecional relaionship beween crude oil, gold and Taiwan soc mare. Bhunia (2013) who employs he similar variables for he case of India also found ha here is long-run coinegraion among all variables under sudy. Gold has been considered as he bes invesmen over cenuries and also sands as a good porfolio diversifier as he price of gold move o he opposie direcion wih anoher financial asse (Krisof, 2011). In fac, in imes of economic and poliical uncerainies, many have chosen gold o sore he value of heir wealh. See: (Aggarwal and Lucey, 2007 and Joy, 2011). Previous sudy by Capie, Mills and Wood (2005) also claimed ha gold can be a hedge o foreign exchange mare. A sudy by Suji and Kumar (2011) who examine he coinegraion beween gold, oil, exchange rae and soc reurn have come ou wih he conclusion ha volailiy in exchange rae mare is derived from anoher hree variables. They also summarized ha gold price flucuaions depend on he commodiy iself no from oil price and oher index. The finding is also in line wih research paper by Bilal, Abu Talip, Haq, Khan and Naveed (2013) and Shahzadi and Chohan (2011) who repored ha here is no long-run relaionship beween Karachi Soc Exchange (KSE) equiy index and he price of gold. Bashiri (2011) also found he same conclusion of no correlaion beween gold-index nexus for Armenia and Iran over 2005-2010 periods. Oher sudy by Basher e al. (2012) suppor ha oil prices deermine he movemen of exchange rae among emerging economies. In paricular, he sudy which uilised impulse response funcions indicaes ha he rise of oil prices would weaen he emerging soc mares and exchange rae. 217
Inernaional Journal of Business and Social Science Vol. 5, No. 7(1); June 2014 Some researchers limi heir sudy on he examinaion beween equiy index and exchange rae nexus among emerging mares: See: (Chowdhury, 2004; Doong e al., 2005; Md-Yusof and Abd Rahman 2013). Arouri e al. (2011) who used generalised VARGARCH approach have explored he lin beween Gulf Cooperaion Council (GCC) equiy mares and crude oil over period of 2005 o 2010. Their findings suggesed ha here is volailiy rasmission beween crude oil prices and GCC equiy mares. Anoher papers which share he same findings are hose by Fayyad and Daly (2011), Fillis, Degiannais, Floros (2011) and Mohany, Nandha, Turisani and Alaiani (2011) in paricular conclude ha oil mare is no a good hedge agains losses in soc mare during financial urmoil. The papers by Burbridge and Harrison (1984), Gisser and Goodwin (1986), Loungani (1986), Mor (1989), Guo (2005), Breienfellner and Crespo (2008) are example of sudies which es on he causal relaion beween oil price and macro-economic variables. Subsanial number of researchers een o sudy he impac of oil price shocs o he world economy due o flucuaion of oil prices which bring major impac o he world economy. Bénassy-Quéré, Mignon and Peno (2007) who explores he oil price-dollar inegraion over a period of 1974 o 2004 claimed ha he causaliy run from oil price o dollar. See: (Amano and Van Norden, 1998; Liu, 2010; Novony, 2012) for similar findings in heir sudies. The above discussion illusraes ha here is no heoreical or empirical consensus on he direcion and he sign of he relaionship beween crude oil, gold, exchange rae and soc mare index. Thus, his paper aemps o provide new empirical evidence idenifying he correlaion of he commodiy and financial secor using daa from hree Souheas Asia counries over 20 years of sudy (1993-2013). These counries have beenseleced due o relaively lile research has focused on he relaionship beween commodiy and financial variables on he said counries 3. Daa and Mehodology In analyzing he dynamic correlaion beween commodiies and financial variables among emerging economies, crude oil (Crude Oil Daed Bren U$/BBL) and gold (Gold Bullion LBM U$/Troy Ounce) are seleced as proxy for commodiies. While, exchange rae and he leading index for each counry are chosen o represen financial variables. As for his research, he prominen soc index of each counries are seleced; Malaysia (FBM KLCI), Thailand (SET Index) and Indonesia (IDX Composie). The period under sudy spans from November 8, 1993 unil November 8, 2013 (20 years of sudy). These weely daa are gahered from Daasreamand ransformed ino naural logarihm for furher analysis. A group of economerics approaches are uilized in order o achieve he objecives of his paper. However, a significan problem associaed wih economerics esimaion using non-saionary variables is spurious (nonsense) regression. Yule (1926) says ha spurious regression can persis in large samples wih non-saionary ime series. Thus, uni roo ess are conduced in order o secure a valid, meaningful and non-spurious regression. There are several ess available for uni roo or non-saionariy esing. The pioneer wor on esing on uni roo es for ime series daa was carried ou by Dicey and Fuller (Fuller, 1976 and Dicey and Fuller, 1979). The objecive of he es is o verify he null hypohesis ha β = 1 in y = βy -1 + u agains one-sided alernaive β < 1. In conducing he DF es, i was assumed ha he error erm, µ was uncorrelaed or in oher words, he es only valid if µ is whie noise. Thus, boh discoverers augmen he es by adding he lagged values of he dependen variable Y. The es which is nown as Augmened Dicey-Fuller (ADF) consiss of esimaing he following regression: Y = β 1 + β 2 + δy -1 + α i Σ Y -i + ε whereε is a pure whie noise error erm and where Y -1 = (Y -1 - Y -2 ). Anoher uni roo es conduced in his sudy is Phillips-Perron (PP) Uni Roo es. Phillips and Perron (1988) have developed a more comprehensive heory of uni roo. The ess are similar o ADF ess bu he PP uni roo es differen from he ADF ess in erms of how i reas he serial correlaion and heerosedasiciy in he errors. In paricular, he PP ess ignore any serial correlaion in he es regression, whereas he ADF ess use a parameric auoregression o approximae he Auoregressive Moving Average (ARMA) srucure of he errors in he es regression. 218
Cener for Promoing Ideas, USA www.ijbssne.com The es usually gives similar conclusions as he ADF ess, and he calculaion of he es saisics is complex. Boh ADF and PP uni roo ess employ ha he series is no saionary as he null hypohesis whereas rejecion of he null hypohesis suppors saionariy. Coinegraion heory is an innovaion in heoreical economerics ha has creaed he mos ineres among economiss in he las decade. Economically speaing, wo variables will be coinegraed if hey have a long-erm, or equilibrium relaionship beween hem. The variables in a coinegraing relaionship can wander around over ime since hey are non-saionary. However, here are some economic/financial forces ha can sop hem wandering oo far from each oher. Even hough here are a number of mehods for esing coinegraion have been proposed in he lieraure, Gonzalo (1994) has suppored ha he Johansen procedure is relaively superior over oher mehod for esing he order of coinegraion. Thus, Johansen and Juselius (1990) coinegraion es is adoped o assess for he dynamic correlaion beween commodiies and financial variables. The objecive of Johansen and Juselius (JJ)coinegraion es is o examine he exisence of long-run coinegraion among variables. There are wo es saisics namely; Trace and Max Eigenvalue in his JJ coinegraion es. The es procedure is sequenial where he null hypohesis of zero coinegraionvecor is uilized agains a mos one. The es saisics for JJ coinegraion es are formulaed as follows: race g ( r) T ln(1 ˆ ) ir1 max ( r, r 1 ) T ln( 1 r 1) where i is he esimaed value for he ih ordered eigenvalue from he marix. race ess he null ha he number of coinegraing vecors is less han equal o r agains an unspecified alernaive. race = 0 when all he i = 0, so i is a join es. max ess he null ha he number of coinegraing vecors is r agains an alernaive of r+1. JJcoinegraion es provide criical values for he 2 saisics. The disribuion of he es saisics is non-sandard. The criical values depend on: 1. The value of g-r, he number of non-saionary componens 2. Wheher a consan and / or rend are included in he regressions. If he es saisic is greaer han he criical value from Johansen s ables, rejec he null hypohesis ha here are rcoinegraing vecors in favour of he alernaive ha here are more han r. The dependence of one variable wih anoher variable does no necessarily imply causaion. In anoher words, he direcion of influence or causaliy canno be proved wih he exisence of inerdependency among variables. Forunaely, he causaliy can be esed in ime series vecor auoregression where he es is firs proposed by Granger in year 1969. Causaliy in lieral sense in saisical analysis is conroversial. Noion of Granger causaliy; for example an even (say A) canno cause anoher even (say B) ha already oo place. In anoher words, if A happens before B, A can cause B bu B canno cause A. Saisically, if pas values of a variable (X) can help predicing he curren value of anoher variable (Y), hen X causes Y. Thus, Granger causaliy is a es of precedence or a es of predicabiliy. I is saed ha informaion o predic he value of a variable (Y) is held in is pas values, which is formulaed as: Y i1 Y If here is pas values of oher variable (say X) ha can improve he predicion of Y, hen in ha sense X is aen o Granger cause Y. The following equaion is carried ou for esimaion: Y i1 Y i i Then, o es he null hypohesis he resriced F-es is compued. If null hypohesis is rejeced, i indicaes causaliy runs from X o Y. The Granger causaliy es describes only shor-run relaionship beween variables. However, i migh be he case of addiional long run relaionship exiss beween variables. 219 i i1 i i i X i
Inernaional Journal of Business and Social Science Vol. 5, No. 7(1); June 2014 To assess for he long erm effecs, sandard Granger causaliy es augmened wih error-correcion erms can be used. The augmened Granger causaliy es is formulaed as follows: Specifically, he causaliy es oucome can be divided ino four cases: (i) Unidirecional causaliyeg: X Granger causes Y bu Y does no Granger cause X (ii) Unidirecional relaionship (converse) eg: Y Granger causes X bu X does no Granger cause Y (iii) Feedbac, or bidirecional causaliy eg: X Granger causes Y and Y Granger causes X (iv) Independence eg: X does no Granger cause Y and Y does no Granger cause X 4. The Findings 4.1 Uni Roo Tes To esablish he degree of inegraion among variables, Augmened Dicey Fuller (ADF) and Phillip Perron (PP) uni roo ess are conduced. The resuls of uni roo ess are presened in Table 1. Table 1: Resuls of Uni Roo Tess Level Firs Difference Variables Augmened Dicey Phillips Perron Augmened Dicey Phillips Perron Fuller Fuller LGOLD 0.2225(21) 0.3022-6.4107***(20) -32.4355*** LOIL -1.0262(0) -1.0079-16.6299***(3) -32.1524*** LKLCI -1.3712(12) -1.3351-8.9740***(11) -31.8815*** LSET -1.3684(4) -1.3183-15.1498***(3) -30.9460*** LIDX 0.09188(11) -0.1187-10.7955***(10) -35.7031*** LMYR -1.8007(14) -1.8931-7.1953***(13) -39.0737*** LBAHT -1.9152(16) -1.8658-7.9366***(15) -30.2316*** LRUPIAH -2.0939(21) -1.9567-5.7780***(20) -37.5697*** Noe: *** (**) and * denoes significan a 1%, 5% and 10% significan level respecively. Figure in he parenhesis represens opimum lag lengh seleced based on Aaie Info Crierion. Alhough wo differen uni roo ess are employed, he resuls of boh he ADF es and he PP es are similar. The ADF and PP ess agree in classifying he commodiies and financial variables of all emerging economies as I(1) ha is hey are non-saionary in level bu become saionary afer firs differencing. All he variables are significan a 1% confidence level wih opimum lag lengh is seleced based on Aaie Info Crierion. Thus, rejec he null hypoheses ha he series have uni roos in he level esimaions of he variables. 4.2 Johansen Juselius Coinegraion Tes Y 1 1 iy i 1 ix i 1 1 u1 i1 i1 X 2 2iY i 2iX i 2 1 u2 i1 i1 Nex, he srucures of linages among variables are examined using he JJcoinegraion es. The lag lengh for he VAR is chosen so ha he error erms are serially uncorrelaed. This research indicaes ha seing he lag lengh up o 24 is adequae o render he error erms serially uncorrelaed in conducing he es. The resuls of Johansen Juseliuscoinegraion es are repored in Table 2. 220
Indonesia Thailand Malaysia Cener for Promoing Ideas, USA www.ijbssne.com Table 2: Resuls of Johansen Juselius Coinegraion Tess H 0 Malaysia Thailand Indonesia Trace Max Trace Max Trace Max r=0 156.0 a 47.16 a 246.6 a 69.91 a 181.4 a 54.05 a r 1 108.8 a 44.24 a 176.7 a 65.00 a 127.3 a 46.78 a r 2 64.59 a 33.89 a 111.7 a 58.31 a 80.58 a 43.30 a r 3 30.70 a 30.70 a 53.43 a 53.43 a 37.27 a 37.27 a Noe: r denoes he number of coinegraing vecors. Numbers in parenheses nex o r=0 unil r 3 represen he 5% criical values of he es saisic. An ( a ) indicaes rejecion of he null hypohesis of no-coinegraion a 5% level of significance. As being illusraed in Table 2, he Trace and Maximal Eigenvalue saisics sugges he presence of a leas hree coinegraing vecor for each emerging counry. This means ha he crude oil and gold are ied ogeher wih he exchange rae and index for each counry in he long run and heir deviaions from he long-run equilibrium pah will be correced. Accordingly, he resuls sugges he exisence of dynamic correlaion beween commodiies and financial variables among Souheas Asia counries under sudy. 4.3 Granger s Causaliy Tes The presence of coinegraion has rules ou non-causaliy among variables. Thus, Granger causaliy es is conduced o confirm he causal direcion. Table 3 below shows he resuls of Granger causaliy es. Table 3: Resuls of Granger Causaliy Tess Dependen variables LGOLD LOIL LCURRENCY LINDEX LGOLD 24.7206 24.1141 19.1089 LOIL 24.3406 17.7519 17.3727 LCURRENCY 26.0389 46.5827*** 71.1530*** LINDEX 30.9763 38.0605** 101.46*** LGOLD 15.5595 14.3664 15.8507 LOIL 19.3080 13.9692 25.9785* LCURRENCY 15.5309 24.2700* 23.5876* LINDEX 29.5529** 22.4514 32.7646*** LGOLD 23.8309 18.5372 19.6677 LOIL 23.5611 19.6647 37.1640** LCURRENCY 13.6723 45.0999*** 71.5575*** LINDEX 18.4502 26.6104 60.7807*** Noe: The boldface caegories denoe he dependen variables; *, ** and *** indicae rejecion region of he causaliy a he 10%, 5% and 1% confidence levels, respecively. The resuls of Granger causaliy es suggess ha here are bidirecional causaliy beween he leading index and exchange rae for each Souheas Asian counries (Malaysia, Thailand and Indonesia) under sudy. The resuls are consisen wih he research previously done by Bahmani-Osooee and Sohrabian (1992), Chowdhury (2004), Doong e al. (2005) and Md-Yusof and AbdRahman (2013). The findings indicae ha anyhing happen o he value of Malaysian currency in relaion o US Dollar eiher appreciae or depreciae will give an impac owards Bursa Malaysia and vice versa. I was happened during he 1997 Asian financial crisis as well as he 2008 global financial crisis, whereby Malaysia s foreign currency mare was badly affeced and so oo was he equiy mare. Thus Souheas Asian governmens have o be cauions in he implemenaion of equiy mare and exchange rae policies as such policies would influence each oher. Oher han ha he causaliy es reveals ha exchange rae Granger causes crude oil (unidirecional causaliy) in Malaysia, Thailand and Indonesia. The finding is conradiced o he sudy by Amano and Van Norden (1998), Lizardo and Mollic (2010) and Bénassy-Quéré e al. (2007) however, confirms he discoveries by Liu (2010) and Novony (2012). 221
Inernaional Journal of Business and Social Science Vol. 5, No. 7(1); June 2014 According o Liu (2010), he relaionship beween exchange rae and crude oil is unsable due o muliple srucural breas over he sample period and also ime-varying in erms of impac magniude. This parially explains why researchers have mixed resuls over sudy on exchange rae and crude oil nexus. Despie he finding on causal direcion beween exchange rae-index and exchange rae-crude oil, gold has remained as he leas affeced commodiy by oher variable and also sand as he commodiy ha play fewes role in affecing anoher variables. According o Suji and Kumar (2011), he flucuaions in gold prices are largely dependen on he prices of gold iself raher han crude oil and oher indices. The resuls are also in line wih he previous lieraure by Bilal e al. (2013) who documened ha no causal ineracion exiss among average gold prices and soc indices. The resul also suggess ha gold is he srong safe haven, by moving agains oher asses which is in conras o Baur and McDermo, 2010. 5. Conclusions All of he previous lieraures discuss on he correlaion beween commodiies and financial variables done heir research mosly on he developed counries. No many sudies focus on he Asian counries especially Souheas Asian counries. Thus, his paper is he firs of is ind o conribue o he recen areas of financial economics. Some of he major findings ha can be exraced from he empirical sudies are as follows: i. There is bidirecional causaliy beween he leading index and exchange rae for each Souheas Asian counries (Malaysia, Thailand and Indonesia) ii. Exchange rae Granger causes crude oil (unidirecional causaliy) in all Souheas Asia counries; Malaysia, Thailand and Indonesia. iii. Gold is he leas affeced commodiy and also commodiy ha play fewes role in affecing anoher variables The findings of his research have several implicaions especially in erms of porfolio diversificaion. To inves in Souheas Asian counries, invesors should be more cauious since anyhing happen o he soc mare will have an effec o he exchange rae and vice versa. The appreciaion and depreciaion of exchange rae definiely will affec he reurn of he invesmen. Besides ha individual/insiuional invesor should have closer loo o any policy regarding exchange rae as i has feedbac effec owards leading index for mos of he counries under sudy. Sill, gold remain as safe haven in porfolio diversificaion among commodiies. The resul of his paper is also useful o he Souheas Asian governmens paricularly in he enforcemen of equiy mare and foreign exchange policies as such policies would impac each oher. The hree Souheas Asian counries also should si ogeher and discussed on he policy concerning he soc mare and foreign exchange mare. A consensus framewor should be vigilanly consruced so ha he effec of financial crisis will be reduced should here be any more crises in he fuure. Since his paper focused on Souheas Asia counries, i is suggesed ha fuure researcher conduc he similar sudy in differen counries or compare beween wo ses of counries. Fuure researcher migh also ae ino consideraion he effec of major srucural breas which his paper has no aen ino consideraion. I is also recommended o use anoher choice of variable as a proxy of financial variables and more advance mehod for furher research. References Aggarwal, R., and Lucey, B.M., (2007). Psychological barriers in gold prices?review Financial Economic,16, 217 230. Amano, R. A. and Van Norden, S. (1998), Exchange raes and oil prices. Review of Inernaional Economics, 6(4), 683-694. Arouri, M. E. H, Lahiani, A. and Nguyen, D. K. (2011) Reurn and volailiy ransmission beween world oil prices and soc mares of he GCC counries, Economic Modelling, 28, 1815 1825. Arouri, M. E. H., Jouini, J., & Nguyen, D. K. (2012). On he impacs of oil price flucuaions on European equiy mares: Volailiy spillover and hedging effeciveness. Energy Economics, 34(2), 611 617. Bahmani-Osooee, M. and Sohrabian, A. (1992) Soc prices and he effecive exchange rae of he Dollar, Applied Economics, 24, 459 464. Basher, S. A., Haug, A. A., and Sadorsy, P. (2012). Oil prices, exchange raes and emerging soc mares. Energy Economics, 31(1), 227 240. Bashiri, N. (2011). The sudy of relaionship beween soc exchange index and gold price in Iran and Armenia rerived on 30 January 2012 from hp://www.armef.com/pdfs/neda_bashiri_2.pdf 222
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