The relationship between South Asian stock returns and macroeconomic variables

This article investigates whether economic variables have explanatory power for share returns in South Asian stock markets. In particular, using data for four South Asian emerging stock markets over the period 1998–2012, the article examines the influence of a selection of local, regional and global economic variables in explaining equity returns; most previous studies that have examined this issue have tended to focus on only local and/or global factors. Important factors are identified by distilling the macroeconomic variables into principal components. Economic activities, real interest rates, real exchange rates and the trade balance represent local factors. Regional factors are represented by interregional trade and regional economic activity while global factors are represented by world financial asset returns and world economic activity. The vector autoregression results suggest that the South Asian markets examined are not efficient. Both local and regional factors can directly and indirectly explain Bangladeshi, Pakistani and Sri Lankan stock returns while the lagged returns of the Pakistani stock market and world economic activity can explain Indian stock returns.     

The integration of direct real estate and stock markets in Asia

Currently, there exists relatively little research investigating the long-term association between stock and direct real estate markets. Using appropriate transaction-based property indices, this study focuses on the relationship between stock and direct real estate markets in nine Asian countries from the period 1980 to 2012 through both linear and nonlinear cointegration techniques. We find empirical evidence of linear cointegration of stock and property markets in Taiwan, fractional cointegration in Singapore and Hong Kong and no evidence of cointegration in China, Japan, Thailand, Malaysia, Indonesia and South Korea. It is concluded that segmentation of property markets from stock markets does not appear to be linked to the differences in the maturity of national financial markets and that the differing degrees of integration across Asia may instead be reflective of a range of factors impacting upon the underlying economic structures in each country.     

International co-movements of real and financial economic variables

This study presents a first attempt at investigating whether the international co-movements of real economic activity conform to the same international co-movements of financial activity. This study tests the international co-movements of real economic activity, on the one hand, and financial variables such as stock returns, interest rates, inflation rates and risk premiums, on the other hand. We employ a dynamic correlation model on data from OECD countries for the period 1980–2010. Our findings demonstrate that international stock markets co-react in accordance with the underlying international economic forces. We also document three other results. First, the correlation among countries with respect to real economic activity is statistically positive, but the level of this correlation is lower than that of financial variables. Second, there is a significant increase over time in the international correlation level with respect to the financial variables. Finally, the creation of the Euro Monetary Union and the adoption of an inflation targeting policy in many countries have increased the international correlation of all of the financial variables tested. The article concludes with two implications from these findings: (1) predictions in the context of international portfolio diversification, and (2) policy making at the fiscal and monetary levels.     

Spillover effects of the 2008 financial crisis on NIE stock markets

This article estimates dynamic conditional correlations of stock returns across countries by using DCC–GARCH model and analyse spillover effects of the 2008 financial crisis on the NIE’s stock markets. The results show that there is no regime shift in mean equation of the correlation coefficient during the financial crisis. It may imply there are no mean spillover effects of the US financial crisis on the NIE’s stock markets. However, there are volatility spillover effects of the financial crisis sparked in 2008 from the US to the NIE’s markets.     

对外开放和经济波动的关联性检验——中国和东亚新兴市场国家的案例

本文运用研究非对称性冲击问题的实证方法考察和比较了东亚4国(韩国、印尼、泰国和中国)在经济开放过程中内外金融资源的相对价格——实际利差的变化及由此引起的宏观经济(产出、货币和银行信贷)的波动特征。这一研究的政策意义在于通过区分外部因素的基本面(mean)变化和突发性的波动(volatility)对本国经济所产生的不同性质的溢出效应(spillover),为政府制定不同的针对性措施提供理论根据。通过引入非对称“时变波动”(asymmetrictimevaryingvolatility)特征的二元EGARCHVAR实证模型,论文得到了三个主要结论第一,虽然为维持名义汇率的稳定,各国政府都积极地干预外汇市场,由此影响了当期内外利差的收敛,但包括中国在内的4个国家金融的实际开放程度都在不断加大。第二,除上世纪90年代国际资本移动的鼎盛阶段外,各国的经济波动并不是由外部冲击直接带来的,而是国内经济的不确定因素导致的。第三,比较各国经济波动特征,可以发现汇率制度、金融市场的开放程度以及资本市场的发展状况对经济波动有很大的影响。     

Impacts of China's crash on Asia-Pacific financial integration: Volatility interdependence,information transmission and market co-movement

This paper examines the price and volatility dynamics between China and major stock markets in the Asia-Pacific, investigating the effects of the Chinese stock market crash (2015–2016) for the first time. Employing the Bayesian VAR and BEKK GARCH, we observe that price and volatility spillover behaviours are different during the stable and stress periods. Particularly, price spillovers from China to other regional markets are more significant during a bullish period, showing that ‘good news’ emanating from China has strong impacts on its neighbours during better market condition. In the turbulent period, we observe strong shock spillover effects and enhanced volatility spillovers from China to most Asia-Pacific stock markets. This is because China, as an important trading partner and strategic financial centre shows to exert significant influence on the Asia-Pacific region through various economic channels. We also find that the Asia-Pacific stock markets spill over their shocks to China during the crisis, indicating that China is becoming more integrated with the regional financial markets.     

Equality of interest rates revisited: the multi‐country evidence

One influential aspect of international integration of financial markets is the possibility of reducing divergences between domestic interest rates and foreign interest rates or increasing the degree to which yields in different financial markets move together over time. In this study, we investigate the convergence of the real interest rates using the Kalman filter. Applying the modified Hall et al. () approach, we model the risk premium and convergence of real interest rates using the time‐varying parameter estimation techniques. We present evidence of risk premium and convergence for two blocks of countries—The Asian‐Pacific countries including the US, Japan, Taiwan and South Korea and the US‐European group including France, the UK, Germany and the US.     

Liquidity in Asian markets: Intensity of Regional and global linkages

This study investigates cross-market linkages and the intensity of liquidity spillovers across nine Asian markets and five developed markets during 2006 to 2016. Further, the study examines the contagion caused by recent global financial crisis and its impact on the market liquidity. The direction and intensity of spillovers has been measured using forecast error variance decomposition method as suggested by Diebold and Yilmaz (2012). Among the developed markets, the United States, Germany and the United Kingdom significantly affect liquidity changes in Asian countries like India, China, Singapore and Japan. The results revels that on average, each Asian market receives 7% spillover from the global markets and 16% from regional markets. During the financial crisis, the average regional spillover increased to 20% and the global spillover increased to 11%. Thus, in Asia, the regional spillover is higher than the global spillover. Our results support the demand side hypothesis and suggest that it is the trade and portfolio investments that drive the liquidity spillovers. Our findings have potential implications for international investors, policy makers and market regulators.     

The asymmetric price adjustment between REIT and stock markets in Asia-Pacific markets

This paper applies the threshold error correction model to examine the relationship for real estate investment trusts (REITs) and stock, and their asymmetric adjustment behaviors in six Asian/Pacific financial markets: Australia, Japan, Singapore, Taiwan, Korea, and Hong Kong. Our results show that there has been long-term equilibrium in REIT and stock indices in most of these markets. To earn exceptional profits, it is recommended that investors can sell (buy) the REITs when the indices of REITs are lower (higher) than equilibrium in Australia, Singapore and Taiwan; on the other hand, they should sell (buy) when the REIT market goes up (down) in Hong Kong and Japan. A causality test revealed that previous information about stocks predicted changes in the REITs in all the Asian/Pacific markets. One can also find that the lead–lag relationships are significant. The threshold EC model predicts two-way causality under both the regimes for the financial markets in most countries during all the sample periods. In addition, the adjustment speeds for the stock indices are faster than that for the REIT indices as disequilibrium occurs. This paper also finds that the previous mentioned trading strategies generally remained the same during the period of sub-prime mortgage crisis. However, the threshold EC model predicts one-way causality for both the regimes for the financial markets in most countries during this crisis period. In addition, we also find that the severe shock in REIT markets led investors in Australia and Taiwan to be more conservative during this period. The REIT indices had more effect on stock indices after the sub-prime mortgage crisis. According to the empirical results, we can infer that the degree of market imbalance and the occurrence of the sub-prime mortgage crisis induce the changes in the investment behavior of market participants.     

Worldwide impact of IMF policies during the Asian crisis: who does the IMF help,creditors or crisis countries?

This paper examines the effects of International Monetary Fund (IMF) policy announcements on financial markets worldwide. We investigate reactions from stock, bond, foreign exchange and futures markets and banking and financial companies during the Asian crisis. We explore the impact of IMF bailouts not only on crisis countries, but also on main creditor countries. We study the impact of local governments’ and public responses in crisis countries to account for interaction between the IMF and local parties. We show IMF involvement and local governments’ co-operation actually helps crisis countries but not creditors. We show that in crisis countries, financial markets generally react unfavourably to their governments’ initial demands for IMF assistance, while compliance of the crisis countries with the IMF policy action is commonly perceived as good news. Financial markets in crisis countries react negatively to prolonged negotiations and government actions against IMF policy. Creditor countries’ financial markets are not responsive to IMF actions in crisis countries. We discuss policy implications of findings.     

The source of global stock market risk: A viewpoint of economic policy uncertainty

This study explores the effect of economic policy uncertainty (EPU) in four countries or regions (China, Japan, Europe, and the United States) on the contagion risk of investments in the global stock market. The stock returns of 22 stock markets worldwide are analyzed to determine which region’s EPU exhibits the greatest effect on regional systematic risk in the global stock market and on volatility risk in individual stock markets. First, all of the samples, the markets of different continents and the spillover indices of the developed and emerging markets, are calculated to observe the dynamic correlation among these markets with the aim of quantifying regional systematic risk and further examining the contagion risk effect of EPU. The results indicate the following: EPU in China is the most influential, and its contagion risk spreads to different regional markets, except for Europe; the effect of EPU in the United States is inferior to that in China; EPU in Japan merely influences contagion risk in emerging markets; contagion risk in European markets is not influenced by the four EPU indices; and EPU in Europe is not influenced by contagion risk in the global stock market. However, according to the volatility risk in each market, the EPU in Europe and China respectively influence Asian countries and European countries the most. These results may be attributable to the extremely high trade dependence among these countries because the performance of international enterprises is mainly determined by the economic policies of their trading partners.     

Integration Among Asia‐Pacific and International Stock Markets: Common Stochastic Trends and Regime Shifts

Are stock markets in the Asia‐Pacific region integrated with each other and with the US and Japan? The paper examines a number of common stochastic trends among stock prices in the US, Japan, Hong Kong, Korea, Singapore, Taiwan and Thailand. If integration exists it is a fairly recent phenomenon. Institutional and economic considerations suggest the same is true so that a single common stochastic trend among Asian and North American markets is a recent phenomenon. The reason is that the stock markets studied were only recently sufficiently liberalized to permit some form of integration to emerge. Also, not only was the 1987 stock market crash significant, but the 1991 Gulf War also signalled a turning point in the degree of stock market integration among the countries studied.     

Financial contagion and volatility spillover: An exploration into Indian commodity derivative market

This study measures the extent of financial contagion in the Indian asset markets. In specific it shows the contagion in Indian commodity derivative market vis-à-vis bond, foreign exchange, gold, and stock markets. Subsequently, directional volatility spillover among these asset markets, have been examined. Applying DCC-MGARCH method on daily return of commodity future price index and other asset markets for the period 2006–16, time varying correlation between commodity and other assets are estimated. The degree of financial contagion in commodity derivative market is found to be the largest with stock market and least with the gold market. A generalized VAR based volatility spillover estimation shows that commodity and stock markets are net transmitters of volatility while bond, foreign exchange and gold markets are the net receivers of volatility. Volatility is transmitted to commodity market only from the stock market. Such volatility spillover is found to have time varying nature, showing higher volatility spillover during the Global Financial Crisis and during the period of large rupee depreciation in 2013–14. These results have significant implication for optimal portfolio choice.     

FINANCIAL CRISES AND INTERNATIONAL STOCK MARKET VOLATILITY TRANSMISSION

This paper examines the interplay between stock market returns and their volatility, focusing on the Asian and global financial crises of 1997–98 and 2008–09 for Australia, Singapore, the UK, and the US. We use a multivariate generalised autoregressive conditional heteroskedasticity (MGARCH) model and weekly data (January 1992–June 2009). Based on the results obtained from the mean return equations, we could not find any significant impact on returns arising from the Asian crisis and more recent global financial crises across these four markets. However, both crises significantly increased the stock return volatilities across all of the four markets. Not surprisingly, it is also found that the US stock market is the most crucial market impacting on the volatilities of smaller economies such as Australia. Our results provide evidence of own and cross ARCH and GARCH effects among all four markets, suggesting the existence of significant volatility and cross volatility spillovers across all four markets. A high degree of time‐varying co‐volatility among these markets indicates that investors will be highly unlikely to benefit from diversifying their financial portfolio by acquiring stocks within these four countries only.     

Are fundamentals still relevant for European economies in the post-Euro period?

A structural VAR model, with stock prices, real economic activity, a short-term interest rate and inflation, was applied to four European countries to investigate whether economic fundamentals play an important role in their national stock markets. The analysis considers the pre- and post-Euro introduction periods. In general, the results suggest a breakdown in the relationship between real economic activity and real stock returns during the post-Euro period. Second, impulse response analyses reveal that (shocks by) fundamental variables still influence somewhat real stock returns for some countries but the extent and nature of their impact differ among countries in the post-Euro period. Finally, an examination of equity risk premiums corroborates the above findings and, overall, they may be interpreted as the equity markets having a mind of their own, disconnected from the fundamentals and that they are significantly affected by foreign rather than country-specific forces.     

What matters in the finance–growth nexus of advanced economies? Evidence from OECD countries

Over the last decades, a large strand of finance and growth literature has provided ample evidence on the importance of financial deepening for economic development. Yet, recently, the focus of public debate has shifted towards the role of the financial system structure, an area in which empirical research remains relatively sparse and exploratory in nature. With this article, we aim to contribute to that debate by analysing the role the financial system structure plays in economic growth and risk. Focusing on stock markets and studying OECD economies over 1994–2013, we find that, ceteris paribus, financial systems with relatively larger stock markets facilitate economic growth and dampen economic risk. Our findings remain robust under application of instrumental variable and system generalized method of moments estimators, as well as when we use an alternative definition of stock market development, estimate median regressions, examine relatively high-frequency annual data, control for systemic banking crises or apply quadratic specifications. We find no such effect for private bond markets or private credit volume. Overall, our results suggest that financial system structure matters for the economic development of advanced economies and highlight the importance of a debate about the optimal structure of an economy’s financial system.     

Financial connectedness revisited: the role of Fama-French risk factors

We study the contributions of Fama-French type risk factors to spillovers across global stock markets by combining the framework proposed by Diebold and Yilmaz(2009) with insights from asset pricing. We demonstrate that incorporating the risk factors absorbs approximately 40% of information from DY’s total spillover measure to blur the boundaries between ‘To’ and ‘From’ countries and alleviates its upward trend. We find that the DY’s spillover index after controlling for the risk factors yet fluctuates in accordance with historically important economic events over time. Last but not least, the stock market characteristics implied by risk factor exposures are revealed to play the crucial role in determining the Net spillover direction among global equity markets.     

The comovement between exchange rates and stock prices in the Asian emerging markets

This study investigates the comovement between exchange rates and stock prices in the Asian emerging markets. The sample covers major institutional changes, such as market liberalization and financial crises, so as to examine how the short-term and long-term relations change after such events. The autoregressive distributed lag (ARDL) model proposed by Pesaran et al. (2001) is adopted, which allows us to deal with structural breaks easily, and to handle data that have integrals of different orders. Interest rates and foreign reserves are also included in the analysis to reduce potential omitted variable bias. My empirical results suggest that the comovement between exchange rates and stock prices becomes stronger during crisis periods, consistent with contagion or spillover between asset prices, when compared with tranquil periods. Furthermore, most of the spillovers during crisis periods can be attributed to the channel running from stock price shocks to the exchange rate, suggesting that governments should stimulate economic growth and stock markets to attract capital inflow, thereby preventing a currency crisis. However, the industry causality analysis shows the comovement is not stronger for export-oriented industries for all periods, such as industrials and technology industries, thus implying that comovement between exchange rates and stock prices in the Asian emerging markets is generally driven by capital account balance rather than that of trade.     

Risk Shocks and Credit Spreads

What moves corporate bond credit spreads? This paper employs a novel statistical method to extract the shock that accounts for the maximal amount of the forecast error variance of credit spreads over a given forecast horizon. I find that the extracted shock can explain a substantial portion of unpredictable fluctuations in credit spreads. In particular, impulse response functions indicate that it has a significant adverse effect on economic activity and financial markets, and closely resemble those of the risk shock as reported in Christiano et al. (2014). To investigate this interpretation more formally, I identify the risk shock using the VIX index as a measure of uncertainty proposed by Bloom (2009) and show that surprisingly, the two shocks are intimately related despite using different identification procedures. This finding implies that the risk shock is the main driver of movements in credit spreads, providing empirical evidence on their strong linkages with macroeconomic dynamics, as well as on their roles in presenting valuable information about future economic activity.     

Stock market integration and risk premium: Empirical evidence for emerging economies of South Asia

This article investigates the dynamics of regional financial integration and its determinants in an international setting. We test a conditional version of the International Capital Asset Pricing Model (ICAPM) accounting for the deviations from Purchasing Power Parity (PPP) as well as temporal variations in both regional and local sources of risk. Using data from five major South Asian markets (Malaysia, Thailand, Singapore, Indonesia, and Sri Lanka), our results support the validity of an ICAPM and indicate that the risk is regionally priced. Furthermore, we show that changes in the degree of regional stock market integration are explained principally by the U.S. term premium, and the level of market openness, whatever the measure of currency risk. Finally, and as expected, the degree of stock market integration varies considerably over time and from one market to another. As intense market integration induces both benefits and risks, our findings should have significant implications for economic policies and market regulations in emerging, frontier-emerging and transition countries, particularly for countries from the same region.