The Cointegration of Five ASEAN Stock Markets
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Transcript The Cointegration of Five ASEAN Stock Markets
Are ASEAN Stock Markets
Interdependent?
ECON 7710
CHE Yuen Shan
GUERRA Archimedes David
Evidence #1
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
00
01
02
03
JCI
SET
04
05
06
KLCI
STI
07
08
PSEI
09
10
4,000
Evidence
#2
JCI
3,000
2,000
1,000
0
1,600
KLCI
1,200
800
400
5,000
PSEI
4,000
3,000
2,000
1,000
0
1,200
SET
1,000
800
600
400
200
4,000
STI
3,000
2,000
JCI
4,
00
0
3,
00
0
2,
00
0
0
1,
00
0
1,000
400
800
1,200
KLCI
1,600 0
2,000
4,000
PSEI
6,000 0
400
800
SET
1,2001,000
2,000
3,000
STI
4,000
Evidence #3
Correlation
JCI
KLCI
PSEI
SET
STI
JCI
KLCI
1.0000
0.9519
0.9491
0.8015
0.8631
1.0000
0.9639
0.8136
0.9317
PSEI
1.0000
0.8008
0.9487
SET
STI
1.0000
0.7681
1.0000
Why is it important to know if stock
markets are interdependent?
Serve as the basis for global diversification strategy
Help guide regional financial policy formulation
Reflect regional economic couplings or linkages
Spurious Regression
4,400
4,000
3,600
PSEI
3,200
2,800
2,400
2,000
1,600
1,200
800
0
1,000
2,000
JCI
3,000
4,000
Spurious Regression
4,400
4,000
3,600
PSEI
3,200
2,800
2,400
2,000
1,600
1,200
800
0
1,000
2,000
JCI
3,000
4,000
Cointegration tests
aim to avoid “spurious
regressions”, and show
valid long term
equilibrium
relationships (Granger
1986)
The Data
Adjusted weekly closing prices of five ASEAN stock
market indices:
Indonesia – Jakarta Composite Index (JCI)
Malaysia – Kuala Lumpur Composite Index (KLCI)
Philippines – Philippine Stock Exchange Index (PSEI)
Singapore – Straits Times Index (STI)
Thailand – Stock Exchange of Thailand Index (SET)
Advantages of weekly data
Daily data contain “too much noise” (Bailey and Stulz,1990)
Monthly data highly seasonal (Roca et al., 1998)
The Data
Period of study: January 3, 2000 to November 8, 2010
(567 weeks)
After 1997 Asian financial crisis
Covers widespread use of Internet and other advances in
communications technology
Includes period from 2008 subprime crisis to today
The indices are in domestic currency to avoid problems
from transforming the indices into one currency due to
the cross-country exchange rate (Subramanian 2008)
The Data
Descriptive Statistics:
Weekly Closing Prices
Mean
SD
Min
Median
Max
Skewness
Kurtosis
PSEi
2,097
821
993
1,917
4,342
0.6218
-0.6747
JCI
1,288
862
337
1,074
3,699
0.7162
-0.6765
KLCI
951
247
558
902
1,516
0.5301
-0.8325
STI
2,219
624
1,171
2,087
3,819
0.4780
-0.7383
SET
581
192
258
654
1,050
-0.1714
-1.2329
The Data
Descriptive Statistics:
Weekly Closing Prices in Natural Log
Mean
SD
Min
Median
Max
Skewness
Kurtosis
PSEi
7.5732
0.3877
6.901
7.5588
8.376
0.113
-1.0991
JCI
6.9227
0.7051
5.8215
6.979
8.2159
0.0544
-1.4155
KLCI
6.8247
0.2548
6.3237
6.8043
7.324
0.1693
-0.9684
STI
7.6658
0.2802
7.0655
7.6433
8.2477
0.0402
-0.9108
SET
6.3028
0.3673
5.5533
6.483
6.9563
-0.5029
-1.1903
Methodology
Unit Root Test
1.
To find out if the time series are nonstationary , and are
integrated of the same order, I(d)
An I(d) time series has to be differenced d times before it becomes
stationary
Cointegration Test
2.
To test the presence of long-run equilibrium relationships
among nonstationary time series, or if these share similar
stochastic trends
Granger Causality Test
3.
To test possible short-term price linkages among the ASEAN
markets (Roca et al. ,1998)
Unit Root Test
Augmented Dickey-Fuller (ADF) Test
Extends the standard Dickey-Fuller test to cover higher-order
autoregressive processes, AR(p)
yt yt 1 x' 1yt 1 2yt 2 ... p yt p vt
Tests the following hypotheses using the t-ratio
H0 : = 0
H1 : < 0
where = - 1
Unit Root Test
Phillips-Perron (PP) Test
Modifies the t-ratio of the coefficient so that serial
correlation does not affect the asymptotic distribution of the
test statistic
1/ 2
0
~
t t
f0
T ( f 0 0 )(se(ˆ ))
1/ 2
2 f0 s
Unit Root Test Results
ADF
Market
Level
First Difference*
Indonesia
1.8192
-25.1760
Malaysia
0.0094
-22.5287
Philippines
0.4786
-24.1537
Singapore
-0.7405
-23.2428
Thailand
-0.1224
-23.1362
*Significant at 0.001 level for all markets
PP
Level
1.3378
-0.2363
0.4427
-1.0089
-0.1868
First Difference*
-26.3160
-22.5905
-24.5323
-24.9313
-23.1875
All market index series are nonstationary
All market index series are integrated of order one, or
I(1)
The set of series are fit for cointegration testing
Cointegration Test
Johansen Cointegration Test (1995)
Given a VAR of order p
yt A1 yt 1 ... Ap yt p Bxt t
where yt is a k-vector of nonstationary I(1) variables, xt is a dvector of deterministic variables, and t is a vector of
innovations. This VAR may be rewritten as
p 1
yt yt 1 i yt i Bxt t
i 1
where
p
Ai I
i 1
p
i A j
j i 1
Cointegration Test
Assumptions
The level data yt have no deterministic trends and the
cointegrating equations have intercepts:
yt 1 Bxt ( ' yt 1 0 )
Lag Interval: 1 1
Cointegration Test Results
Unrestricted Cointegration Rank Test (Trace)
Hypothesized
No. of CE(s)
None *
At most 1
At most 2
At most 3
At most 4
Eigenvalue
0.0675
0.0310
0.0158
0.0123
0.0079
Trace
Statistic
77.7479
38.2704
20.4650
11.4699
4.4802
0.05
Critical Value Prob.**
76.9728
0.0436
54.0790
0.5587
35.1928
0.6971
20.2618
0.4974
9.1645
0.3453
Trace test indicates 1 cointegrating eqn(s) at the 0.05 level
* denotes rejection of the hypothesis at the 0.05 level
**MacKinnon-Haug-Michelis (1999) p-values
Cointegration Test Results
Unrestricted Cointegration Rank Test (Maximum Eigenvalue)
Hypothesized
No. of CE(s)
None *
At most 1
At most 2
At most 3
At most 4
Eigenvalue
0.0675
0.0310
0.0158
0.0123
0.007898
Max-Eigen
Statistic
0.05
Critical Value
Prob.**
39.4775
34.8059
17.8054
28.5881
8.9951
22.2996
6.9897
15.8921
4.480234 9.164546
Max-eigenvalue test indicates 1 cointegrating eqn(s) at the 0.05 level
* denotes rejection of the hypothesis at the 0.05 level
**MacKinnon-Haug-Michelis (1999) p-values
0.0129
0.5923
0.9043
0.6708
0.3453
Granger Causality Test
The following error correction models are tested:
Unrestricted models:
p
p
i 1
p
i 1
p
Yt i X t i i Yt i et 1 wt
X t i Yt i i X t i et 1 wt
i 1
Restricted models:
i 1
p
Yt i Yt i et 1 wt
i 1
p
X t i X t i et 1 wt
i 1
The null hypothesis is all the s of the unrestricted model
equals zero. If the null hypothesis is rejected, then the
series are Granger causes to each other.
Granger Causality Test Results
Index Explained
PSEi
JCI
KLCI
STI
SET
PSEi
3.60**
(0.0584)
0.08
(0.7774)
4.54**
(0.0335)
2.67
(0.1029)
0.68
(0.4096)
Explanatory Index
JCI
KLCI
STI
2.88*
114.18*** 12.08***
(0.0903) (0.0001) (0.0005)
1.77
173.56*** 15.14
(0.1842) (0.0001) (0.0001)
2.21
0.17
16.46***
(0.1373) (0.6839) (0.0001)
10.63
111.99*** 4.68
(0.0012) (0.0001) (0.0309)
1.05
66.36*** 5.75
(0.3051) (0.0001) (0.0168)
SET
4.29**
(0.0388)
7.15***
(0.0077)
7.55***
(0.0062)
0.02
(0.8817)
2
(0.1576)
Granger Causality Test Results
The ASEAN market indices, except the PSEi, are not
significantly affected by their own previous prices
KCLI has a two-way linkage with all other markets. PSEi
has a unidirectional causality with all the indices except
KCLI
Both STI and SET can only be explained by the past price
of KLCI significantly and are insignificantly explains be the
other ASEAN market indices
References
Abhyankar, A., “Linear and nonlinear Granger causality: Evidence from the U.K. stock
index futures market.” Journal of Futures Markets 18 (1998), 519-540.
Bailey, W. and Stulz, R., “Benefits of International Diversification: The Case of the
Pacific Basin Stock Markets.” Journal of Portfolio Management (Summer 1990), 57-61
EViews 6 User’s Guide II. Quantitative Micro Software, LLC (2007).
Granger, C.W.J, “Causality, cointegration, and control.” Journal of Economic Dynamics
and Control 12 (1988), 551-559.
Granger, C.W.J, “Developments in the Study of Co-integrated Economic Variables.”
Oxford Bulletin of Economics and Statistics 48 (1986), 226
Granger, C.W.J, “Investigating Causal Relationships by Econometric Models and
Cross Spectral Models.” Econometrica 37 (1969), 424-438.
References
Helmut, L., Hans-Eggert, R., “Granger-causality in cointegrated VAR processes: The
case of the term structure.” Economics Letters 3 (1992), 263-268.
Johansen, S., Likelihood-based Inference in Cointegrated Vector Autoregressive Models.
Oxford: Oxford University Press (1995).
Roca, E. D., Selvanathan, E. A., Shepherd, W. F., “Are the ASEAN Equity Markets
Interdependent?” ASEAN Economic Bulletin 15 (1998), 109-120.
Subramanian, U., “Cointegration of Stock Markets in East Asia.” European Journal of
Economics, Finance and Administrative Sciences 14 (2008).
http://support.sas.com/rnd/app/examples/ets/tourism/index.htm
http://support.sas.com/documentation/cdl/en/etsug/60372/HTML/default/etsug_var
max_sect049.htm
http://support.sas.com/rnd/app/examples/ets/granger/index.htm