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2007
Dynamic linkages between Thai and international
stock markets
Abbas Valadkhani
University of Wollongong, abbas@uow.edu.au
S. Chancharat
University of Wollongong, sc983@uow.edu.au
Recommended Citation
Valadkhani, Abbas and Chancharat, S.: Dynamic linkages between Thai and international stock markets 2007.
http://ro.uow.edu.au/commpapers/354
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Dynamic linkages between Thai and international stock markets
Abstract
This paper investigates the existence of cointegration and causality between the stock market price indices of
Thailand and its major trading partners (Australia, Hong Kong, Indonesia, Japan, Korea, Malaysia, the
Philippines, Singapore, Taiwan, the UK and the US), using monthly data spanning December 1987 to
December 2005. Both the Engle-Granger two-step procedure (assuming no structural breaks) and the
Gregory and Hansen (1996) test (allowing for one structural break) provide no evidence of a long-run
relationship between the stock prices of Thailand and these countries. Based on the empirical results obtained
from these two residual-based cointegration tests, potential long-run benefits exist from diversifying the
investment portfolios internationally to reduce the associated systematic risks across countries. However, in
the short run, three unidirectional Granger causalities run from the stock returns of Hong Kong, the
Philippines and the UK to those of Thailand, pair-wise. Furthermore, there are two unidirectional causalities
running from the stock returns of Thailand to those of Indonesia and the US. We also found empirical
evidence of bidirectional Granger causality, suggesting that the stock returns of Thailand and three of its
neighbouring countries (Malaysia, Singapore and Taiwan) are interrelated. No previous study examines the
possibility that the pair-wise long-run relationship between the stock prices of Thailand and those of both
emerging and developed markets may have been subject to a structural break.
Keywords
thailand, stock markets, cointegration, structural breaks
Publication Details
This article originally published as: Valadkhani, A, and Chancharat, S, Dynamic Linkages between Thai and
International Stock Markets, Journal of Economic Studies, 2008, in press (accepted 17 August 2007).
Copyright Emerald 2008. Original journal information available here.
This journal article is available at Research Online: http://ro.uow.edu.au/commpapers/354
Dynamic linkages between Thai and international
stock markets
Abbas Valadkhani and Surachai Chancharat
School of Economics, University of Wollongong, NSW 2522 Australia
This paper investigates the existence of cointegration and causality between the stock
market price indices of Thailand and its major trading partners (Australia, Hong Kong,
Indonesia, Japan, Korea, Malaysia, the Philippines, Singapore, Taiwan, the UK and the
US), using monthly data spanning December 1987 to December 2005. Both the EngleGranger two-step procedure (assuming no structural breaks) and the Gregory and
Hansen (1996) test (allowing for one structural break) provide no evidence of a long-run
relationship between the stock prices of Thailand and these countries. Based on the
empirical results obtained from these two residual-based cointegration tests, potential
long-run benefits exist from diversifying the investment portfolios internationally to
reduce the associated systematic risks across countries. However, in the short run, three
unidirectional Granger causalities run from the stock returns of Hong Kong, the
Philippines and the UK to those of Thailand, pair-wise. Furthermore, there are two
unidirectional causalities running from the stock returns of Thailand to those of
Indonesia and the US. We also found empirical evidence of bidirectional Granger
causality, suggesting that the stock returns of Thailand and three of its neighbouring
countries (Malaysia, Singapore and Taiwan) are interrelated. No previous study
examines the possibility that the pair-wise long-run relationship between the stock
prices of Thailand and those of both emerging and developed markets may have been
subject to a structural break.
Keywords Stock markets, Cointegration, Structural breaks, Thailand
Paper type Research paper
1. Introduction
There are many reasons why stock markets of different countries may have significant
co-movements. For example global capital movements and the presence of economic
ties and regional policy coordination among countries can directly or indirectly
interconnect their stock prices through time. According to Phylaktis and Ravazzolo
(2005), unlike other crises, the Asian crisis engulfed a group of countries that were both
financially and economically integrated prior to the crisis. However, Chan et al. (1997)
argue that although common economic and geographic factors were considered as
crucial factors, they were not necessarily major causes of national stock markets to
follow the same stochastic trend. It is also argued that there is less evidence of stock
market integration after major stock market crises and hence international
diversification among stock markets can be undertaken more effectively due to the lack
of long-run co-movements of international stock prices (Patev et al., 2006). In the
context of the Malaysian stock market, for example, Ibrahim and Aziz (2003) provide
1
some evidence that the Asian crisis appears to give rise to irregularity in the interactions
between stock prices and macroeconomic variables.
A growing interest in the integration of international stock markets is evident in the
number of empirical studies that examine the various aspects of stock market linkages.
These studies were mainly motivated by the stock market crash in October 1987 and
subsequent Asian financial crisis in 1997. For instance, Susmel and Engle (1994),
Fraser and Power (1997), Kanas (1998b) and Fratzscher (2002) examine volatility
spillovers across stock markets; while Phylaktis and Ravazzolo (2002) report their test
results using international capital asset pricing models.
In addition to these studies, cointegration techniques in the literature are widely
used to investigate the long-run relationships between stock markets. These studies can
be classified into three groups. First, some focus mainly on developed markets in the
US, Canada, Europe and Japan (for example, Kasa, 1992; Richards, 1995; Choudhry,
1996; Kanas, 1998a; Hamori and Imamura, 2000; Ahlgren and Antell, 2002) and find
some evidence that there are interdependent linkages among the stock markets of
developed countries. Second, other studies in the literature examine the stock price
linkages among only emerging stock markets, without capturing the important influence
of stock markets in developed countries. They find only weak evidence of a relationship
among the Asian stock markets (for more details see Chaudhuri, 1997; Sharma and
Wongbangpo, 2002; Worthington et al., 2003; Yang et al., 2003).
The last group of studies examines the interdependencies between developed and
emerging markets but they do not incorporate the effect of possible structural changes in
the long-run relationships, such as the 1987 great crash and the Asian financial crisis in
1997. Due to earlier inconclusive results, there is no consensus among previous studies
as to whether international stock markets are interdependent. For instance, while Masih
and Masih (1999) and Syriopoulos (2004) found some pair-wise long-run relationships
between stock markets in developed countries and the stock markets of emerging
countries, other studies (such as Chang, 2001; Ng, 2002; Climent and Meneu, 2003) do
not find any empirical evidence suggesting that stock market dependence exists among
such countries. These studies have deepened our understanding of the interplay among
international stock market linkages; however, allowing for a possible break in
cointegration vectors, this paper specifically examines the interplay between the stock
markets in Thailand and 11 other countries, including both developed and emerging
markets.
Compared to previous studies, this paper differs in two aspects. First, no previous
study examines the possibility that the pair-wise long-run relationship between the stock
prices of two countries may have been subject to a structural break. In addition to the
Engle–Granger two-step procedure, this paper employs the Gregory and Hansen (GH,
1996) cointegration test, which allows for a structural break in the cointegrating vector.
Gregory and Hansen argue that structural breaks have important implications for
cointegration analysis because these breaks can decrease the power of cointegration
tests and lead to the under-rejection of the null hypothesis of no cointegration.
Second, as discussed earlier, most previous studies focus on developed markets,
and few examine both emerging and developed markets. In contrast, this study
examines whether the Thai stock market is linked with the stock markets of its major
trading partners. No existing study focuses specifically on the Thai stock market,
although some include Thailand in their sample countries (for example, Masih and
2
Masih, 1999; Chang, 2001; Ng, 2002; Sharma and Wongbangpo, 2002; Climent and
Meneu, 2003; Worthington et al., 2003; Phylaktis and Ravazzolo, 2005).
The 1997 Asian financial crisis first began with the floating of the Thai baht in July
1997, and soon after, the crisis spread rapidly to the Philippines, Malaysia, Indonesia
and Korea. Following this crisis, relatively small depreciations also engulfed Singapore
and Japan (Barro, 2001). Therefore, Thailand can be considered as an important case
among other emerging markets. In 2004, on the Stock Exchange of Thailand (SET),
market turnover was 93.8 per cent, there were 465 listed domestic companies, and the
value traded was $US109,949 million. The SET was classified as the ninth highest
among emerging markets in terms of these three measures, and the nineteenth, twentieth
and twenty-fourth on a global scale. In terms of market capitalisation, the SET reached a
record high $US115,400 million, which ranked twelfth-highest among all emerging
markets and thirty-first in the world (Standard and Poor’s, 2005).
This paper investigates the long-run and short-run relationships between the Thai
stock market and those of its major trading partners: Australia, Hong Kong, Indonesia,
Japan, Korea, Malaysia, the Philippines, Singapore, Taiwan, the UK and the US. We
chose these eleven countries because of their relatively high share of Thai exports and
imports. It should be noted that Japan and the US are Thailand’s two biggest trading
partners. Malaysia, Singapore, Indonesia and the Philippines are all members of the
Association of Southeast Asian Nations (ASEAN), which aims to remove trade barriers
among its member countries. Hong Kong, Taiwan and Australia are also among
Thailand’s top-ten trading partners, followed by Korea and the UK, which are just
outside the top ten.
The remainder of the paper is structured as follows. Section 1 discusses briefly the
empirical methodology adopted in the paper. Section 2 describes the summary statistics
of the data. Section 3 presents the empirical results of cointegration and causality tests.
Finally, Section 4 provides some concluding remarks.
2. Empirical methodology
We initially performed the augmented Dickey-Fuller (ADF) unit root test to examine
the time series properties of the data without allowing for any structural breaks. The
ADF test is conducted using this equation:
k
yt =
+ βt + αy t −1 + ∑ ci y t −i + ε t
(1)
i =1
Where yt denotes the time series being tested; yt = ln( Pt i ) , ln( Pt i ) is the natural
logarithm of the stock market price index in country i; is the first different operator; t
is a time trend term; k denotes the optimal lag length; and ε t is a white noise disturbance
term.
In this paper, the lowest value of the Akaike information criterion (AIC) was used
as a guide to determine the optimal lag length in the ADF regression. These lags
augment the ADF regression to ensure that the error term is white noise and free of
serial correlation. In addition, the Phillips-Perron (PP) test was used as an alternative
nonparametric model to control for serial correlation. Using the PP test ensures that the
higher-order serial correlations in the ADF equation were handled properly. That is, the
ADF test corrects for higher-order autocorrelation by including lagged differenced
terms on the right-hand side of the ADF equation; whereas the PP test corrects the ADF
t-statistic by removing the serial correlation in it. This nonparametric t-test uses the
3
Newey-West heteroscedasticity autocorrelation consistent estimate, and is robust to
heteroscedasticity and autocorrelation of unknown form.
An important shortcoming associated with the ADF and PP tests is that they do not
allow for the effect of structural breaks. Perron (1989) argues that if a structural break in
a series is ignored, unit root tests can be erroneous in rejecting null hypothesis. Zivot
and Andrews (ZA, 1992) developed methods to search endogenously for a structural
break in the data. We employ their ‘model C’, which allows for one structural break in
both the intercept and slope coefficients in the following equation:
k
yt =
+ β t + θDU t + γDTt + αy t −1 + ∑ ci y t −i + ε t
(2)
i =1
Where DU t = 1 if t > TB , otherwise zero; TB denotes the time of break; and
DTt = t − TB if t > TB , otherwise zero.
The ‘trimming region’, in which we searched for TB covers the 0.15T-0.85T period,
where T is the sample size. Following Chaudhuri and Wu (2003) and Narayan and
Smyth (2005), we selected the break point (TB) based on the minimum value of the t
statistic for α. In this study, kmax is set equal to 12.
After determining the order of integration of each variable, we needed to test for the
existence of any long-run relationship between the stock prices of Thailand and its
major trading partners. We employed the Engle-Granger two-step procedure first by
obtaining the resulting residuals of the following equation, and then conducting a unit
root test on them:
yt = 0 + β t + ϕ xt + ε t
(3)
Where yt and xt are the natural log of the stock price indices of Thailand and one of its
major trading partners, respectively.
According to Engle and Granger (1987), if both yt and xt are I(1), and εˆt is I(0),
then a long-run relationship between these two variables exists. The resulting errorcorrection model (ECM) from such a model can then be written as:
k1
k2
yt = φ + ∑ λi xt −i + ∑ δ i yt −i + η ECM t −1 + vt
i=0
(4)
i =1
Where λi s are the estimated short-term coefficients; δ i s denotes the estimated
coefficients of the lagged dependent variables added to ensure vt or the disturbance term
is white noise; η is the feedback effect capturing the speed of adjustment, whereby
short-term dynamics converge to the long-term equilibrium path indicated in equation
(3); and ECMt or εˆt is obtained from equation (3) by the OLS method.
The general-to-specific methodology can then be used to omit insignificant
variables in equation (4) based on a battery of maximum likelihood tests. In this method
joint zero restrictions are imposed on explanatory variables in the unrestricted (general)
model to obtain a parsimonious model. The null hypothesis of no cointegration is
rejected if η < 0 and is statistically significant.
The lack of evidence of cointegration in previous studies in the literature could be
attributed to the ignorance of the structural break in cointegrating vector. To address this
issue, we also used the GH (1996) test. GH (1996) postulate three alternative models
similar to those proposed by ZA (1992) to capture the changes in parameters of the
cointegrating vector. First, the level shift model (C), which assumes a change only in
the intercept, as shown below:
4
yt = 0 + θ DU t + 1 xt + ε t
(5)
The second model, a level shift and change in trend (C/T), takes this form:
yt = 0 + θ DU t + β t + 1 xt + ε t
(6)
The third model, which allows for changes in both the intercept and slope of the
cointegration vector (C/S), is presented as:
yt = 0 + θ DU t + β t + 1 xt + 2 xt DU t + ε t
(7)
Where DU t is defined as previously in equation (2).
Intuitively, within the range of 0.15T-0.85T, this technique searches for a particular
TB, which minimises the value of the ADF* statistic for εˆt . The GH (1996) method tests
the null hypothesis of no cointegration against the alternative hypothesis of
cointegration with a single structural break at time TB, which is determined
endogenously.
Finally, we conducted the Granger causality test based on the error correction
model specified in equation (4). A variable such as xt (the stock returns) Granger
causes yt if its past values can explain yt , but past values of yt do not explain xt
(Granger, 1969). If the two variables are not cointegrated, and η in equation (4) is not
negative and significant, the following bivariate VAR equations will then be used for
the causality test:
k1
k2
yt = φ + λ0 xt + ∑ λi xt −i + ∑ δ i yt −i + vt
(8)
xt = φ ′ + λ0′ yt + ∑ λi′ yt −i + ∑ δ i′ xt −i + vt′
(9)
i =1
k ′1
i =1
i =1
k ′2
i =1
On the other hand, if yt and xt are cointegrated, these error correction models are
adopted:
k1
k2
yt = φ + λ0 xt + ∑ λi xt −i + ∑ δ i yt −i + η ECM t −1 + vt
(10)
xt = φ ′ + λ0′ yt + ∑ λi′ yt −i + ∑ δ i′ xt −i + η ′ECM t −1 + vt′
(11)
i =1
k ′1
i =1
i =1
k ′2
i =1
The Granger causality test can be conducted under two assumptions. First, if yt and xt
are not cointegrated, then we can use equations (8) and (9) to test the following two null
hypotheses: If in equation (8) H o : λ1 = λ2 = ... = λk1 = 0 is rejected, then
xt = ln Pt j − ln Pt −j1 , or the stock price return in country j, Granger causes
yt = ln Pt i − ln Pt i−1 or the stock price return in country i. This can be written as
xt → yt . Similarly, if, in equation (9), H o′ : λ1′ = λ2′ = ... = λk′1 = 0 is rejected, then we
can conclude that yt causes xt or yt → xt . If both null hypotheses are rejected
simultaneously, there would be a bidirectional causality between the two variables, that
is, yt ↔ xt . Second, if yt and xt are in fact cointegrated, then we need to use
equations (10) and (11) to test the same two hypotheses. The inclusion of ECM in these
two equations ensures that the long-term run properties of the data are not lost when
dealing with the first difference form. If in equation (10), H o : λ1 = λ2 = ... = λk1 = 0 is
rejected, then xt → yt ( xt Granger causes yt ), or xt → yt . In the same way, if
5
in equation (11), H o′ : λ1′ = λ2′ = ... = λk′1 = 0 is rejected, then one can conclude that
yt → xt . If both H o and H o′ are rejected, the causality between the two variables is
bidirectional, or yt ↔ xt .
3. Data and summary statistics
The data included in this paper include the stock prices of these 12 countries: Thailand
(TH), Australia (AU), Hong Kong (HK), Indonesia (IN), Japan (JA), Korea (KO),
Malaysia (MA), the Philippines (PH), Singapore (SG), Taiwan (TA), the UK and the
US. Monthly data span December 1987 to December 2005, with a base value of 100 in
December 1987. All stock price indices were obtained from Morgan Stanley Capital
International (MSCI) which is one of the widely used sources of financial data in the
literature (Hamori and Imamura, 2000; Ahlgren and Antell, 2002; Ng, 2002; Climent
and Meneu, 2003; Worthington et al., 2003) in terms of the degree of comparability and
avoidance of dual listings. Since this paper is concerned with the comparative
performance of the international stock markets, all price indices (P) are denominated in
US dollars. The MSCI indices for different markets are computed using the same
consistent formula which is value weighted. The rate of returns ln(Pt/Pt-1) calculated
from the MSCI price indices which consists of both capital gain and income gain .
[Table I about here]
Table I presents the descriptive statistics of the data, including sample means,
medians, maximums, minimums, standard deviations, skewness, kurtosis as well as the
Jarque-Bera statistics and p-values. The highest mean return is 0.008 per cent in Hong
Kong and the US while the lowest is 0.000 per cent in Japan. The standard deviations
range from 0.041 per cent in the US (the least volatile) to 0.145 per cent in are
Indonesia (the most volatile). The standard deviations of stock returns are lowest in
developed economies (that is, the US, the UK, Australia and Japan), and the most
volatile in Indonesia, Thailand, Taiwan and Korea. All monthly stock returns,
ln( Pt / Pt −1 ) , have excess kurtosis, which means that they have a thicker tail and a higher
peak than a normal distribution. The calculated Jarque-Bera statistics and corresponding
p-values are used to test for the normality assumption. Based on the Jarque-Bera
statistics and p-values, this assumption is rejected at any conventional level of
significance for all stock returns, with the only three exceptions being the monthly stock
returns in Australia, Japan and the UK.
4. Empirical results
As mentioned earlier, we first used the ADF and PP tests to determine the order of
integration of the 12 stock prices studied. The lowest value of the AIC was used to
determine the optimal lag length in the estimation procedure. Based on the results of the
unit root tests presented in Table II, the ADF and PP tests reject the random walk
hypothesis for only the stock price index in Taiwan at the five and one per cent
significance levels, respectively. However, for all other countries, both unit root tests
cannot reject the random walk hypothesis. We thus conclude that the stock price indices
in 11 out of the 12 countries are I(1).
[Table II about here]
In the second stage, we subjected each variable to one structural break. For each
series, we then carried out the ZA test (model C) and report the results in Table III,
below. As mentioned earlier, the ADF and PP test results reveal that most stock prices
6
examined in this paper followed a random walk; whereas the results of the ZA test show
that stock prices for three countries (that is, Indonesia, Korea and Malaysia) are now
stationary. Despite allowing for one endogenous structural break in the data, the data in
the remaining nine countries still contain a unit root. The estimated coefficients and θ
are statistically significant for all variables, except for θ in the case of the Philippines
stock prices. There was at least one structural break in the intercept during the sample
period for all stock prices. The estimated coefficients for β and γ are also statistically
significant in eight and nine out of 12 countries, respectively, implying the stock price
series exhibits an upward or downward trend and at least one structural break in trend in
these countries exists.
The reported TBs in the second column of Table III were endogenously determined
by the ZA test. In addition, Figure 1 shows ln( Pt ) and ln( Pt / Pt −1 ) (monthly return) for
each of the 12 countries, as well as their corresponding structural breaks obtained by the
ZA test. It is not surprising that the endogenously-determined structural breaks in these
stock prices occurred mostly in the Asian crisis period 1996–1997 (see TBs for
Thailand, Indonesia, Korea, Malaysia, Singapore, the UK and the US in Table III).
[Table III and Figure 1 about here]
Because the majority of the stock price indices are non-stationary, we conducted
the Engle-Granger cointegration test. Table IV shows the results of this test for all 12
countries. The results show that the null hypothesis of no cointegration cannot be
rejected for all pair-wise cases. In order to make robust conclusions, we also conducted
the GH test, and the results are presented in Table V. Similar to the Engle-Granger test
results, we found that the Thai stock price index is not cointegrated with the stock prices
of any other of the 11 countries in our sample. This means that there is no pair-wise
long-run relationship between the stock prices in Thailand and its trading partners.
Importantly, according to Table V, the structural break in the cointegrating vector for
most countries occurred in 1998 (the year after the 1997 Asian financial crisis).
However, the cointegration test results remain robust even after capturing the structural
breaks in cointegrating vectors.
[Tables IV and V about here]
In sum, similar results emerged from applying both the Engle-Granger test and the
GH (1996) test to the data, suggesting that the Thai stock market is not cointegrated
pair-wise with the stock markets of any of these countries: Australia, Hong Kong,
Indonesia, Japan, Korea, Malaysia, the Philippines, Singapore, Taiwan, the UK and the
US. Our results are also consistent with the previous findings of no cointegration
between the Thai stock market and some regional stock markets, including those of
South-East Asia (Ng, 2002) and the Pacific Basin (Chang, 2001; Climent and Meneu,
2003).
Finally, in the absence of long-run relationships between the stock prices of
Thailand and its major trading partners, we then used the Granger causality test to
examine the pair-wise short-run interactions between different stock markets. Table VI
presents the results of the Granger causality tests. The Wald F-statistics are calculated to
test the null hypotheses outlined in the previous section. According to the results
presented in Table VI, in the short term there is a unidirectional Granger causality
running from the stock returns of Hong Kong, the Philippines and the UK to that of
Thailand. On the other hand, there is a unidirectional Granger causality from Thailand’s
stock return to the stock returns of Indonesia and the US. Summers (2000) argues that a
financial crisis in one country, however big or small, can adversely and psychologically
7
affect investors’ perceptions and expectations in other countries. Investors’ reactions to
acute market shocks when coincided with unwise government policy responses can
influence the other markets. For example the Asian crisis influenced the other stock
markets in the world (including the US market) as investors started panicking that the
financial downturn could also engulf their market due to knock-on effects across
international markets. This could partially explain why the stock market return in such a
small country such as Thailand Granger causes the return in the US market.
We also found a bidirectional Granger causality between the market stock returns in
Thailand and its three neighbouring countries (that is, Malaysia, Singapore and
Taiwan). Therefore, the short-run movements of stock returns in these three countries
can influence the performance of Thailand’s stock market. It can also be concluded that
any short-run variation of the stock returns in Thailand can affect the market returns of
its three neighboring countries, and vice versa. Hence, in order to avoid financial
contagion and future crises similar to the one which occurred in 1997, central bankers
and individual investors must keep abreast of new developments in international stock
markets — particularly those for which we found the evidence of bidirectional and
unidirectional causality.
[Table VI about here]
5. Conclusions
This study examines the long-run and short-run relationships between the stock prices
of Thailand and its major trading partners (Australia, Hong Kong, Indonesia, Japan,
Korea, Malaysia, the Philippines, Singapore, Taiwan, the UK and the US), using
monthly data for the period December 1987 to December 2005. In addition to the
Engle-Granger two-step procedure, we used the Gregory and Hansen (1996) test, which
allows for a structural break in the cointegration vector.
Based on the cointegration results, we found no evidence of long-run relationships
between the stock price indices of Thailand and its major trading partners. The policy
implication of this finding for international investors is quite straightforward: in the
long run, there are potential gains (for example, reduced systematic risks) which can be
leveraged by astute investors through portfolio diversification across different
international markets.
Second, in terms of short-run movements of international stock market returns, we
found three pair-wise unidirectional Granger causalities, whereby the returns in Hong
Kong, the Philippines and the UK can Granger cause the return in Thailand. Based on
these results, the performance of stock markets in Honk Kong, the Philippines and the
UK may have a direct bearing on the Thai stock market. However, there were also two
unidirectional Granger causalities running from Thailand to Indonesia and the US. Thus
any abnormal movement in Thailand’s stock returns could lead to similar changes in
Indonesia and the US. Third, we found evidence of a bidirectional Granger causality
between the stock returns in Thailand and those of three of its neighbouring countries
(that is, Malaysia, Singapore and Taiwan). The reported causality test results are useful
for any assessment of the Asian stock markets. For example, the interplay between these
three pairs of countries (Thailand–Malaysia, Thailand–Singapore and Thailand–Taiwan)
can be useful for central bankers and international investors alike in evaluating stock
market performance.
The empirical results presented in this paper support the view that international
investors have long-run opportunities for portfolio diversification by acquiring stocks
from these eleven countries. However, in the short-run the scope of these opportunities
8
is rather limited due to systematic and transitory fluctuations which are inherent to stock
markets as evidenced by the causality test results.
9
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10
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11
Table I. Descriptions of the data (stock return) employed, December 1987-December 2005
Variable
Mean
Median
Maximum
Minimum
Standard
deviation
Skewness
Kurtosis
Jarque-Bera
p-value
ln Pt
TH
0.003
0.007
0.359
-0.416
0.119
-0.394
4.802
34.804
0.000
ln Pt
AU
0.006
0.005
0.157
-0.166
0.053
-0.244
3.464
4.091
0.129
ln Pt
HK
0.008
0.007
0.284
-0.344
0.077
-0.203
5.290
48.907
0.000
ln Pt
IN
0.005
0.009
0.662
-0.525
0.145
0.415
7.320
174.181
0.000
ln Pt
JA
0.000
-0.002
0.217
-0.216
0.066
0.077
3.437
1.944
0.378
ln Pt
KO
0.005
-0.001
0.534
-0.375
0.111
0.306
5.914
79.815
0.000
ln Pt
MA
0.004
0.005
0.405
-0.361
0.091
-0.200
6.731
126.730
0.000
ln Pt
PH
0.002
0.005
0.360
-0.347
0.095
-0.021
4.744
27.405
0.000
ln Pt
SG
0.006
0.009
0.228
-0.231
0.071
-0.502
5.365
59.702
0.000
ln Pt
TA
0.004
0.002
0.381
-0.410
0.113
-0.034
4.179
12.556
0.002
UK
0.006
0.004
0.138
-0.111
0.045
0.083
3.137
0.420
0.810
US
0.008
0.011
0.106
-0.151
0.041
-0.556
3.871
18.022
0.000
ln Pt
ln Pt
Source: Morgan Stanley Capital International, http://www.msci.com/equity/index2.html.
12
Table II. Unit root test results
k
yt =
+ β t + α yt −1 + ∑ ci yt −i + ε t
i =1
ADF test
Constant and
Optimal lag
trend
Variable
ln Pt
TH
ln Pt
TH
AU
ln Pt
AU
ln Pt
ln Pt
HK
ln Pt
ln Pt
IN
ln Pt
ln Pt
JA
KO
ln Pt
MA
ln Pt
MA
ln Pt
PH
ln Pt
PH
ln Pt
SG
ln Pt
ln Pt
TA
ln Pt
TA
ln Pt
UK
US
ln Pt
**
5
-4.656***
6
-14.169***
7
-2.573
0
-2.478
7
***
US
***
4
-16.265
-2.086
0
-2.050
8
-14.003***
0
-14.001***
11
-3.350
8
-2.595
5
***
***
12
1
-12.274
-2.188
0
-2.387
3
-14.151***
0
-14.151***
1
-1.668
0
-1.744
1
-14.103***
0
-14.103***
4
-3.053
9
-2.332
4
-3.862**
10
-12.440***
0
-2.099
1
-2.006
2
***
***
3
0
-11.700
-2.537
0
-2.552
1
-14.393***
0
-14.393***
1
-3.759**
1
-4.068***
5
-13.130
UK
ln Pt
-2.046
-11.696
SG
ln Pt
12
-10.271
KO
ln Pt
ln Pt
IN
JA
ln Pt
-2.372
-9.002
HK
PP test
Constant and
Bandwidth
trend
***
***
3
0
-13.145
-1.551
2
-1.805
6
-13.546***
1
-15.718***
9
-1.178
0
-1.146
3
-15.805***
0
-15.794***
3
***
2
Notes: a) and indicate that the corresponding null hypothesis is rejected at the 5 and 1
per cent significance levels, respectively. b) Critical values at the 5 and 1 per cent are -3.43
and -4.00, respectively (MacKinnon, 1991).
13
Table III. The Zivot and Andrews test results: Break in both the intercept and trend
k
yt =
+ β t + θ DU t + γ DTt + α yt −1 + ∑ ci yt −i + ε t
i =1
k
Inference
α
0.001
-0.170
-0.000
-0.078
0.420
12
Random walk
1996:10
ln Pt
(1.339)
(-3.659)***
(-0.071)
(-3.574)
(3.788)***
0.002
-0.167
0.001
-0.062
0.792
AU
10
Random walk
2001:02
ln Pt
(3.724)***
(-3.651)
(3.240)***
(-2.955)***
(3.667)***
0.002
0.074
-0.002
-0.144
0.652
HK
11
Random walk
1993:01
ln Pt
(2.478)**
(2.320)**
(-2.455)**
(-4.128)
(4.090)***
0.000
-0.258
0.001
-0.137
0.831
IN
8
Stationary
1997:08
ln Pt
(0.708)
(-4.835)***
(1.206)
(-5.695)***
(5.765)***
-0.000
-0.068
0.003
-0.132
0.623
JA
9
Random walk
2002:06
ln Pt
(-2.227)**
(-2.565)**
(2.990)***
(-4.089)
(4.069)***
-0.000
-0.160
0.003
-0.200
1.004
KO
9
Stationary
1997:09
ln Pt
(-0.530)
(-3.906)***
(4.267)***
(-5.444)**
(5.425)***
0.002
-0.234
-0.001
-0.185
0.883
MA
9
Stationary
1997:07
ln Pt
(5.095)***
(-6.121)***
(-2.492)**
(-6.719)***
(6.774)***
-0.090
0.001
0.073
-0.002
0.440
PH
12
Random walk
1993:07
ln Pt
(-3.468)
(1.237)
(1.892)
(-2.163)**
(3.426)***
0.001
-0.075
-0.001
-0.119
0.572
SG
7
Random walk
1997:03
ln Pt
(2.976)***
(-3.081)***
(-2.089)**
(-3.714)
(3.781)***
-0.002
0.109
0.001
-0.150
0.885
TA
9
Random walk
1993:10
ln Pt
(-2.045)**
(2.844)***
(1.570)
(-4.102)
(4.019)***
0.000
0.032
-0.001
-0.077
0.361
UK
2
Random walk
1996:08
ln Pt
(2.016)**
(2.132)**
(-2.148)**
(-3.018)
(3.076)***
0.001
0.040
-0.001
-0.066
0.313
US
7
Random walk
1996:09
ln Pt
(2.568)**
(2.657)***
(-2.761)***
(-3.338)
(3.407)***
Notes: a) ** and *** indicate that the corresponding null hypothesis is rejected at the 5 and 1 per cent significance levels, respectively. b)
Critical values for tα at the 5 and 1 per cent levels are -5.08 and -5.57, respectively (Zivot and Andrews, 1992).
Variable
TB
β
θ
γ
TH
14
Figure 1. Plot of the international stock price indices and market returns
Ln(TH)
Return of TH
Return of AU
7
Ln(AU)
6
Return of HK
6.0
Ln(HK)
5.5
.2
3
.0
4.5
4.5
.0
-.4
-.1
-.2
-.6
-.2
-.4
Ln(TH)
1988 1990 1992 1994 1996 1998 2000 2002 2004
Return of TH
Ln(AU)
Ln(JA)
Return of JA
-.8
1988 1990 1992 1994 1996 1998 2000 2002 2004
Return of AU
Ln(HK)
Ln(KO)
Return of KO
5.2
Ln(IN)
Ln(MA)
Return of MA
6.0
4.0
.1
.6
3.6
3.5
5.0
.4
4.5
.2
4.0
-.2
-.2
-.2
-.3
-.4
-.4
1988 1990 1992 1994 1996 1998 2000 2002 2004
Return of JA
Ln(KO)
Ln(SG)
4.4
.0
4.8
.15
4.4
.10
-.4
.00
-.05
-.10
-.6
Return of SG
Return of PH
Ln(US)
Return of US
6.0
6.5
5.6
6.0
5.2
5.5
4.4
.05
.0
-.2
Ln(SG)
Ln(UK)
4.8
.2
-.2
1988 1990 1992 1994 1996 1998 2000 2002 2004
Ln(PH)
5.2
.4
-.1
-.3
1988 1990 1992 1994 1996 1998 2000 2002 2004
Return of MA
Return of UK
6.4
5.6
4.8
.1
Ln(TA)
5.6
.2
-.4
Ln(MA)
6.0
5.2
4.0
1988 1990 1992 1994 1996 1998 2000 2002 2004
6.0
.3
4.5
-.2
Return of KO
Return of TA
6.4
5.0
.2
.0
.0
Return of SG
.4
.0
-.1
Ln(JA)
6.0
5.5
.6
.2
1988 1990 1992 1994 1996 1998 2000 2002 2004
7.0
6.5
4.5
.4
.0
Ln(PH)
Return of PH
6.5
5.5
4.0
.2
Return of IN
6.0
5.0
4.4
.3
1988 1990 1992 1994 1996 1998 2000 2002 2004
Return of HK
5.5
4.8
3
.0
-.4
1988 1990 1992 1994 1996 1998 2000 2002 2004
4
.4
.2
.1
.0
-.2
5
.8
.4
5.0
.2
7
6
5.5
5.0
4
Ln(IN)
6.0
5
.4
Return of IN
6.5
-.15
1988 1990 1992 1994 1996 1998 2000 2002 2004
Ln(TA)
1988 1990 1992 1994 1996 1998 2000 2002 2004
Return of TA
Ln(UK)
Return of UK
Source: Morgan Stanley Capital International, http://www.msci.com/equity/index2.html.
Note: The vertical line shows the time of the structural break obtained by the ZA (1992) method.
15
5.0
.12
.08
.04
.00
-.04
-.08
-.12
-.16
4.5
1988 1990 1992 1994 1996 1998 2000 2002 2004
Ln(US)
Return of US
Table IV. The Engle-Granger two-step test results
t-statistics
ADF test on εˆt
η̂ coefficient
a
(equation 4)
-1.390
-0.771
-1.270
-1.520
-2.190*
0.109
-1.610
-0.885
-1.470
-2.300*
-3.050*
Notes: a) We do not reject the null (i.e. a unit root in εˆt ) at the 5 per
Thailand-Australia
Thailand-Hong Kong
Thailand-Indonesia
Thailand-Japan
Thailand-Korea
Thailand-Malaysia
Thailand-Philippines
Thailand-Singapore
Thailand-Taiwan
Thailand-UK
Thailand-US
(equation 3)
-2.165(0)
-2.412(12)
-2.965(0)
-2.098(0)
-2.117(0)
-2.884(12)
-2.130(12)
-1.297(2)
-2.406(12)
-2.309(12)
-2.468(12)
cent level or better as the critical values at the 5 and 1 per cent are -3.43
and -4.00, respectively (MacKinnon, 1991). b) Figures in parentheses
are the optimal lag length determined by the AIC.
16
Table V. The Gregory and Hansen test results
Model C: yt =
Model C/T: yt =
Model C/S: yt =
0
0
0
+ θ DU t +
1
xt + ε t
+ θ DU t + β t +
+ θ DU t + β t +
1
xt +
*
1
xt + ε t
2
xt DU t + ε t
Model
TB
ADF
k
Thailand-Australia
C
1998:06
-3.842
12
C/T
1998:07
-3.609
10
C/S
1998:06
-3.862
12
Thailand-Hong Kong
C
1998:06
-3.527
12
C/T
2002:10
-3.797
12
C/S
1998:06
-3.444
12
Thailand-Indonesia
C
1991:12
-3.526
8
C/T
1997:08
-3.301
8
C/S
1991:11
-3.476
8
Thailand-Japan
C
1998:06
-3.130
12
C/T
1998:06
-3.896
12
C/S
1998:06
-3.129
12
Thailand-Korea
C
1998:07
-2.719
10
C/T
1998:07
-3.413
10
C/S
1998:07
-2.660
10
Thailand-Malaysia
C
1998:02
-3.755
12
C/T
2003:06
-3.752
12
C/S
1994:10
-3.461
12
Thailand-Philippines
C
1995:04
-2.795
12
C/T
2001:09
-3.443
12
C/S
1998:06
-2.834
12
Thailand-Singapore
C
1996:04
-2.909
12
C/T
2002:10
-3.675
12
C/S
1996:04
-2.908
12
Thailand-Taiwan
C
1998:06
-3.166
12
C/T
1998:06
-3.706
12
C/S
1998:06
-3.037
12
Thailand-UK
C
1998:06
-3.247
12
C/T
1998:06
-3.947
12
C/S
1998:06
-3.177
12
Thailand-US
C
1992:04
-3.298
12
C/T
1998:06
-4.120
12
C/S
1996:07
-3.349
12
Critical values
5 per cent
1 per cent
C
-4.61
-5.13
C/T
-4.99
-5.45
C/S
-4.95
-5.47
Note: Given the reported critical values (GH, 1996), the null is not
rejected at the 5 and 1 per cent levels of significance for any pair of
countries.
17
Table VI. The Granger causality test results
k1
k2
yt = φ + λ0 xt + ∑ λi xt − i + ∑ δ i yt −i + η ECM t −1 + vt
i =1
i =1
k ′1
k′2
xt = φ ′ + λ0′ yt + ∑ λi′ yt − i + ∑ δ i′ xt − i + η ′ECM t −1 + vt′
i =1
i =1
Null hypothesis
H o : λ1 = λ2 = ... = λk 1 = 0
Inference
No causality
No causality
or
′
′
′
H o : λ1 = λ2 = ... = λk′1 = 0
ln Pt
AU
ln Pt
TH
HK
Unidirectional causality
ln Pt
No causality
ln Pt
No causality
ln Pt
Unidirectional causality
ln Pt TH
No causality
ln Pt
JA
No causality
ln Pt
TH
No causality
ln Pt
KO
No causality
ln Pt
TH
Bidirectional causality
ln Pt
TH
↔
ln Pt
MA
No causality
Bidirectional causality
↔
ln Pt SG
Bidirectional causality
ln Pt
TH
↔
ln Pt
IN
ln Pt MA
ln Pt TH
Unidirectional causality
ln Pt TH
TH
TA
Unidirectional causality
ln Pt
PH
ln Pt
TH
ln Pt
SG
ln Pt TH
ln Pt TA
ln Pt TH
ln Pt
UK
TH
No causality
ln Pt
No causality
ln Pt
Unidirectional causality
ln Pt TH
* **
US
→
→
→
→
→
→
→
→
→
→
→
→
→
→
→
→
→
→
→
→
→
→
F-statistic
Probability
ln Pt
TH
1.034
0.399
ln Pt
AU
1.817
0.111
TH
ln Pt
7.013
***
0.009
ln Pt
HK
0.253
0.616
ln Pt
TH
1.322
0.256
4.290***
0.001
TH
0.144
0.704
JA
1.720
0.191
ln Pt
TH
0.358
0.550
ln Pt
KO
0.404
0.526
ln Pt TH
1.870**
0.046
ln Pt MA
3.771***
0.000
**
0.049
ln Pt IN
ln Pt
ln Pt
ln Pt
TH
PH
1.936
1.628
0.110
*
0.076
ln Pt SG
2.633*
0.051
ln Pt TH
2.690**
0.011
ln Pt TA
1.798*
0.090
ln Pt
ln Pt
ln Pt
TH
TH
2.322
3.358
***
0.006
ln Pt
UK
1.577
0.168
ln Pt
TH
1.422
0.190
2.335**
0.020
ln Pt US
***
Note: , and
indicate that the corresponding null hypothesis is rejected at the 10, 5 and 1 per
cent significance levels, respectively.
18