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Publisher : Elsevier - Science Direct (الزویر - ساینس دایرکت)
Journal : Review of Financial Economics, Volume 11, Issue 2, 2002, Pages 91–108
This study investigates the short-run and long-run relationships among stock indices of the US, Europe, Asia, Latin America, and Eastern Europe–Middle East for the pre-Asian crisis and for the crisis period. The findings from these two periods are compared and contrasted. No long-run relationship is observed among these indices during the pre-Asian crisis period. However, during the crisis period, one significant cointegrating vector is observed and more short-run (i.e., causal) relations are observed in this period as compared to the pre-crisis period. Based on the analysis, we infer that during the Asian crisis period, the globalization increased and only the European markets directly effected the US market, while the other regional markets indirectly influenced the US market via the European market. As regards the effect of shocks, we observe that during the pre-Asian crisis period, the response of all regional markets to shocks in other markets is transitory, whereas during the crisis period, the response of the US stock market is transitory but that of EU market is permanent to all other markets.
Increased economic integration among economies of the world has brought increased attention of investors and academic scholars to the issue of interrelationships among these markets around the world. While integration in banking and financial markets provides some advantages in terms of gains in market efficiency and portfolio diversification, it also offers potential pitfalls. The October 1987 crash of US financial markets led to the doom and gloom in the financial markets around the world. Moreover, the dramatic decline in the Japanese stock market at the beginning of 1990s, as well as the recent recession in mid-1998, and the recent financial crisis in the emerging markets point to an important pitfall for financial institutions investing globally. Peek and Rosengren (1997) argue that the Japanese stock market decline resulted from a decrease in lending by Japanese banks and was transmitted internationally to the US. The economic downturn in Japan originated during the same quarter that the Thai baht was coming under increased pressure in mid-1997. The financial crisis in Thailand rapidly spread to Indonesia, Malaysia, the Philippines, and Korea. In October 1997, the crisis began to affect other economies when speculative pressures intensified against the Hong Kong dollar, the Korean won, and the Taiwanese dollar resulting in drops in their stock markets. A severe drop in Hong Kong's financial market dramatically pushed the global equity prices (affecting Eastern Europe, Latin America, Japan, Europe, and the United States) into a downturn. Consequently, in mid-1998, the East Asian crisis became a worldwide financial and economic crisis hitting developing economies in Latin America, Middle East, Eastern Europe, and North Africa. There are several factors that explain the repercussions from financial crises. First, common shocks such as a steep rise in world interest rates, a sharp decline in world aggregate demand, a slowdown in commodity prices, or large changes in exchange rates between major currencies can induce pressure on currencies of several countries simultaneously. Second, a significant currency depreciation in one country experiencing a financial crisis may affect other countries through trade spillovers due to the improved price competitiveness of the crisis country. Third, the occurrence of a crisis in one or more countries may induce investors to rebalance their portfolios for risk management or other reasons. Fourth, a crisis in one country may wake up other financial markets to reassess their countries' circumstances. Thus, many researchers have investigated the short-term and long-term interrelationships among worldwide financial markets. The primary focus of the empirical research has been the G-7 and other industrialized countries. Lai, Lai, and Fang (1993) observe both the short-run and the long-run feedback relationships between the New York and Japanese stock markets. Kasa (1992) finds a single common stochastic trend among G-7 countries. Among the major European markets, Choudhry (1996), Koutmos (1996), and Serletis and King (1997) all discover long-run relationships. Booth, Martikainen, and Tse (1997) notice a weak relationship among the Scandinavian markets. There are some studies available for the Asian and Pacific markets. Engle and Susmel (1993) test for common volatility in 18 nations' stock markets and report two closed-boundary groups that share similar volatility characteristics. Cheung (1995) observes a long-run relationship among five emerging stock markets: Hong Kong, Korea, Malaysia, Singapore, and Thailand. Furthermore, Corhay, Rad, and Urbain (1995) find that in the long run, there exists a geographical separation between the Asia and the Pacific Markets. Recently, Sharma and Wongbangpo (2002) investigate the long-term trends and cycles of stock markets in Indonesia, Malaysia, Singapore, and Thailand. They observed that the stock markets of Indonesia and Thailand are cycle dominated, and those of Malaysia and Singapore are trend dominated. However, a few studies have investigated the relationships among markets across regions. Masih and Masih (1997) conclude that the markets of Japan, US, UK, and Germany drive the fluctuations in the markets of Taiwan, South Korea, Singapore, and Hong Kong. Kwan, Sim, and Cotsomitis (1995) note that the markets of Hong Kong, Singapore, Korea, and Taiwan are not cointegrated among themselves but they are cointegrated with G-7 countries. Furthermore, Cheung, He, and Ng (1997) investigate the existence of common movement and interaction among the Pacific Rim return, European return, and the North American return from 1970 to 1991. They observe that the North American markets have the most predictive power for the European and Pacific Rim's stock-market movements. The European and Pacific Rim markets have weak ability to influence other regional stock market movements. Specifically, the Pacific Rim markets can explain only about 3% of the North American return variability. Moreover, the European markets significantly affected Pacific Rim stock market movements in the 1980s. The only study that has investigated the effect of local and global events on the international stock markets is that of Aggarwal, Inclan, and Leal (1999). For the period 1985–1995, Aggarwal et al. (1999) observe that global events such as the October 1987 crash and the Gulf War had an impact on many countries. In addition, they also note that local events (the Mexican peso crisis, periods of hyperinflation in Latin America, the stock market in India, and the Marcos–Aquino conflict in the Philippines) in a specific country, which affect the volatility of that country's index, are also reflected in the high volatility of its regional index. For instance, the Mexican peso crisis caused large shifts in the volatility of the Mexican stock market and, hence, the Latin American index. Fama (1981) noted that stock returns are positively related to real variables such as rate of return on capital and output and many studies (e.g., Dhakal et al., 1993, Gallinger, 1994, Mahdavi & Sohrabian, 1991 and Wongbangpo & Sharma, 2002, among others) have supported empirically that stock prices lead economic activities. We believe that the stock index of a country is an indicator of the economic activities of the country and the regional stock index is an indicator of the economic activities of the region. Thus, the objectives of this study are twofold. Since all the studies cited above have investigated the interrelationships among financial markets of different countries in one region, or, the markets across regions, the first objective is to investigate the short-run and long-run relationships among the regional stock market indices, that is, between the indices of US, Europe, Asia, Latin America, and Eastern Europe–Middle East. This is done for the pre-Asian crisis period and during the Asian crisis. Constrained by the availability of the data, for the pre-Asian crisis period, we have considered the time period from Jan. 1, 1990 to Dec. 31, 1996. The Asian crisis period is considered from July 2, 1997 to March 10, 2000. It would be of interest to compare and contrast the findings of these two time periods to learn if any meaningful changes occurred during the crisis period.1 Towards this goal, cointegration analysis, Granger causality tests, and innovation accounting analysis are performed. Cointegration and causal analyses will shed light on the long-term and short-term relationships and impulse response analysis will reveal the speed of transmission of shocks. Since we do not have any theory to specify the structural econometric model, in such situations, it is more appropriate to use time series techniques to investigate the long-term and short-term relations among regional stock indices. Note that in time series analysis, no a priori model is specified, and the inference is made based on analysis of the series. Cointegration, causal, and innovation analyses are the appropriate time series techniques to investigate the long-run and short-term relationships. The second objective of this study is to examine the impact of regional and global crises on the US economy. The analyses of stock prices grouped into regional indices will shed some light on the impact of regional and global crises on the US economy, since the regional stock index is an indicator of the economic activities of the region. A significant long-run relationship among different regional stock indices could be explained due to one or more of the following reasons. Strong economic ties, policy coordination, and trade among the relevant regions may indirectly link their stock indices Cheung & Lai, 1999, Choudhry, 1996 and Ripley, 1973. Economic conditions resulting in lower interest rates and decreased inflation or reflecting the world's general financial condition may, also, lead to co-movement of different stock indices. The real interest rate linkage among regions can facilitate long-run relationships between different stock indices due to its important role in stock markets and due to international capital flows. The growing importance of international investors, the substantial improvements in communication technology, the innovations in financial products and services, and deregulation and liberalization, as well as, the increase in the activities of multinational corporations can further induce long-run relationships among regional stock indices. It is argued that co-movement of regional stock indices may increase after some turmoil in the markets owing to (local and global) contagion effects (Chan, Gup, & Pan, 1997). As mentioned above, there could be many reasons to induce interrelationships among regional stock indices; it would be of interest to investors, policy makers, and academicians to know whether the data reveal any such long-run and short-run relationships. The rest of the study is organized as follows. The model and data are given in Section 2. Long-run relationships and short-run relationships are discussed in 3 and 4, respectively. The findings of innovation analyses are presented in Section 5, and Section 6 concludes this study.
نتیجه گیری انگلیسی
In this study, short-term and long-term relationships are investigated in five regional stock indices for the pre-Asian crisis (January 1, 1990 to December 31, 1996) and Asian crisis (July 2, 1997 to March 10, 2000) periods. No long-term relationship is observed before the pre-Asian crisis. However, one significant cointegrating vector is observed during the crisis period and each market contributed significantly (in a statistical sense) to the long-run relationship. It can be interpreted that the degree of globalization increased during and after the crisis period. The short-term relations are analyzed through Granger causality and innovation analyses. Note that the local events such as the Gulf War, the Japanese stock market decline, and the Mexican peso crisis did not effect the US market in a causal sense in the pre-Asian crisis period. During the crisis, only the European market Granger causes the US market, while the other regional markets indirectly cause the US market via the European market. The direction of causality for the whole system implies that the Asian crisis spread to either Latin American or Eastern Europe-Middle East markets, then to Europe, and finally to the US market. It can be inferred that the outlook for the US economy can be hinted by examining European markets. The innovation analysis supports the causality findings. For the variance decomposition analysis, it can be concluded that local events and financial crises in recent years do not have enough power to influence the US stock market due to the robust US economy. According to the impulse response functions, local events such as the Gulf War, the Japanese stock market decline, and the Mexican peso crisis do not have powerful impacts on other regional markets, that is, the effects will die out within 10 days. The Asian crisis temporarily influenced the US stock market with a time span of 6 days. The repercussions of the Asian crisis to markets in EU, LA, and EM, however, are long lasting. This implies that the US stock market is the most influential among regional markets.