Permanent and Transitory Driving Forces in the Asian-Pacific Stock Markets

This paper uses weekly data from November 1987 through May 1999 to examine whether U.S. or the Japan stock market (or both) is the main driving force behind major movements in eleven emerging Asian-Pacific stock markets. We find a robust cointegrating relation linking each of the emerging market with the two matured markets of the U.S. and Japan. The results also show that the U.S., rather than Japan, is the main permanent force driving the equilibrium relations across all Asian-Pacific markets. In contrast, the effect of the Japanese market on the Asian-Pacific region is only transitory. Therefore, strategic asset portfolios in the Asian-Pacific region should include Japanese stocks to diversify any country specific risks. As to U.S. investors, the persistent influence of the U.S. market may limit long-run diversification gains from Asian-Pacific stocks.     

Money and macroeconomic performance: revisiting divisia money

Recent research suggests that the relation between money and the macroeconomy has sharply weakened in the U.S. after 1980. We reexamine this alleged breakdown by testing for cointegration between the macroeconomy and simple-sum and Divisia monetary aggregates. We check the robustness of our results by modeling multiple key breakpoints around the early 1980s. Unlike the case of simple-sum monetary aggregates, the evidence is overwhelming in its support for cointegration between Divisia money and macroeconomic variables, which persists despite several policy shifts and dramatic financial innovations in the post-1980 period. These results support Divisia money over simple-sum monetary aggregates as a guide in the implementation of monetary policy.     

Price discovery and volatility spillovers in index futures markets: Some evidence from Mexico

This paper investigates the hypotheses that the recently established Mexican stock index futures market effectively serves the price discovery function, and that the introduction of futures trading has provoked volatility in the underlying spot market. We test both hypotheses simultaneously with daily data from Mexico in the context of a modified EGARCH model that also incorporates possible cointegration between the futures and spot markets. The evidence supports both hypotheses, suggesting that the futures market in Mexico is a useful price discovery vehicle, although futures trading has also been a source of instability for the spot market. Several managerial implications are derived and discussed.     

Mortgage Loan Rates and Deposit Costs: Are They Reliably Linked?

The deposit-cost markup theory of Jaffe and Rosens type suggests that the cost of attracting funds determines prices (mortgage loan rates). Other equally plausible theories argue for the reverse chain of events, whereby mortgage loan rates induce changes in the deposit interest rates. We investigate these alternative hypotheses over the monthly period 1970 to 1994 using causality and cointegration tests with allowances for possible structural breaks. The results from error-correction models indicate the presence of bidirectional causality between the mortgage loan rates and the deposit interest rates. The results further show that the two variables exhibit a strong cointegrating relationship and that several factors play an important role in determining both variables. Our findings underscore the need to continue with efforts to develop and test multivariate error-correction models for the joint determination of the mortgage loan rate and the deposit interest rate.     

On the path of integration in the Gulf region

It is examined whether the six countries comprising the Gulf Cooperation Council (GCC) are sufficiently compatible to form a viable economic and financial block in the Gulf region. Despite long and numerous governmental attempts since the mid 1980s, and in spite of public pressures to expedite the process, these countries have thus far failed to achieve full economic and financial integration. Empirical evidence suggests that this apparent failure is unlikely the outcome of economic or financial incompatibility among the countries in the region. The results imply that more efforts should be directed at resolving possible sociopolitical differences that may have hampered real progress toward the emergence of a genuine and effective bloc in the Gulf region.     

Domestic and International Sources of Inflation in Developing Countries: Some Evidence from the Monetary Approach

Using the monetary approach, this paper examines empirically the causes of inflation in twenty-five developing countries. In addition to money supply, the underlying money demand function and foreign exchange rates are taken into account in the inflationary process. The lag structures are determined by Akaike's FPE criterion and the exogeneity assumptions are assessed by Granger-type causality tests. The results suggest that the monetary approach provides adequate explanation of inflation across all countries examined. Besides changes in expected inflation and foreign exchange rates, movements in base money in these countries have significantly contributed to their inflationary pressures. [134, 431]     

On Testing the Random-Walk Hypothesis: A Model-Comparison Approach

The main intention of this paper is to investigate, with new daily data, whether prices in the two Chinese stock exchanges (Shanghai and Shenzhen) follow a random‐walk process as required by market efficiency. We use two different approaches, the standard variance‐ratio test of Lo and MacKinlay (1988) and a model‐comparison test that compares the ex post forecasts from a NAÏVE model with those obtained from several alternative models: ARIMA, GARCH and the Artificial Neural Network (ANN). To evaluate ex post forecasts, we utilize several procedures including RMSE, MAE, Theil's U, and encompassing tests. In contrast to the variance‐ratio test, results from the model‐comparison approach are quite decisive in rejecting the random‐walk hypothesis in both Chinese stock markets. Moreover, our results provide strong support for the ANN as a potentially useful device for predicting stock prices in emerging markets.