Herwany, Aldrin and Febrian, Erie (2008): Co-integration and Causality Analysis on Developed Asian Markets For Risk Management & Portfolio Selection.
Download (361kB) | Preview
Both practitioners and academicians demand a linkage model across financial markets, particularly among regional capital markets, for both risk management and portfolio selection purposes. Researchers frequently use co-integration and causality analysis in investigating the dependence or co-movement of three or more stock markets in different countries. However, they conducted the causality in mean tests but not the causality in variance tests.
This study assesses the co-integration and causal relations among seven developed Asian markets, i.e Tokyo, Hongkong, Korea, Taiwan, Shanghai, Singapore, and Kuala Lumpur stock exchanges, using more frequent time series data. It employs the recently developed techniques for investigating unit roots, co-integration, time-varying volatility, and causality in variance. For estimating portfolio market risk, this study employs Value-at-Risk with delta-normal approach. The results show whether fund managers would be able to diversify their portfolio in these developed stock markets either in long run or short run.
|Item Type:||MPRA Paper|
|Original Title:||Co-integration and Causality Analysis on Developed Asian Markets For Risk Management & Portfolio Selection|
|Keywords:||Risk Management, Causality, Co-integration, Asian Stock Markets|
|Subjects:||D - Microeconomics > D5 - General Equilibrium and Disequilibrium > D53 - Financial Markets
G - Financial Economics > G1 - General Financial Markets
G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice ; Investment Decisions
G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy ; Financial Risk and Risk Management ; Capital and Ownership Structure ; Value of Firms ; Goodwill
G - Financial Economics > G0 - General
|Depositing User:||Aldrin Herwany|
|Date Deposited:||03. Sep 2008 00:01|
|Last Modified:||12. Feb 2013 15:46|
Alexander, C, 1999, Optimal Hedging Using Coin¬tegration, Philosophical Transactions of the Royal Society A 357, 2039-2058. Alexander, C, 2000, Cointegration-based Trading Strategies: A New Approach to Enhanced Index Tracking and Statistical Arbitrage, manuscript, Banking, www.bankingmm.com, 1-6. Alexander, C, 2001, Market Models: A Guide to Financial Data Analysis, John Wiley & Sons, 347-388. Alexander, C, and A. Dimitriu, 2003, Equity Index¬ing, Cointegration and Stock Price Dispersion: A Regime Switching Approach to Market Efficien¬cy, ISMA Centre Discussion Papers in Finance, 2003-02, University of Reading, U.K. Alexander, C, and Thillainathan, 1995, The Asian Connection, Emerging Market Investor, 2, 42^6. Chan, K., B. Gup, and M. Pan, 1992, An Empirical Analysis of Stock Prices in Major Asian Markets and the United Stated, The Financial Review, 27, 289-307. Chan, K., B. Gup, and M. Pan, 1997, International Stock Market Efficiency and Integration: A Study of Eighteen Nations, Journal of Business Finance and Accounting, 24, 803-813. Chandana, C. and Paratab, B. (2002) Foreign direct investment and growth in India: A cointegration approach, Applied Economics, 34, 1061-1073. Christensen, Ben J., Morten Ø. Nielsen, Asymptotic Normality of Narrow-Band Least Squares in the Stationary Fractional Cointegration Model and Volatility Forecasting, University of Aarhus, 2003. Corhay, A., A. Rad, and J. Urbain, 1993, Common Stochastic Trends in European Stock Markets, Economics Letters, 42, 385-390. DiBartolomeo, D., 1999, Active Returns from Pas¬sive Management: Cointegration of Country Indices in EAFE, Northfield Information Ser¬vices (www.northinfo.com) manuscript, l-8.c Duan, J.C., and S. Pliska, 1998, Option Valuation with Cointegrated Prices, working paper, Department of Finance, Hong Kong University of Science and Technology. Dwayer, G., and M. Wallace, 1992, Cointegration and Market Efficiency, Journal of International Money and Finance, 11, 318-327. Engle, R., and C. J. W. Granger, 1987, Cointegra¬tion and Error-Correction: Representation, Esti-mation, and Testing, Econometrica, (March), pp. 251-276. Fraser, P., and O. Oyefeso, 2005, U.S., U.K., and European Market Integration, Journal of Busi¬ness Finance and Accounting, 32, 161-182. French and Poterba (1991), Investor Diversification and International Equity Markets, American Economic Review (Papers and Proceedings), 81, 222-226. Gerristis, R., and A. Yuce, 1999, Short- and Long-term Links Among European and U.S. Stock Markets, Applied Financial Economics, 9, 1-9. Granger, C. W. J. & Joyeux, R. (1980), ‘An introduction to long memory time series models and fractional differencing’, Journal of Time Series Analysis 1, 15—39. Granger, C. W. J. (1981), ‘Some properties of time series data and their use in econometric model specification’, Journal of Econometrics 16, 121—130. Granger, C. W. J., and J. J. Hallman, 1991, Long Memory Series with Attractors, Oxford Bulletin of Economics and Statistics, 53, 11-26. Granger, C. W. J., and Morgenstern, D. (1970), Pre¬dictability of Stock Market Prices, Heath-Lex-ington Books, Lexington, MA. Hall, S. and Milne, A. (1994) The relevance of p-star analysis to UK monetary policy, The Economic Journal,104, 597-604. Hilliard, J. E. (1979), Relationship Between Equity Indices on World Exchanges, Journal of Finance, 34, 103-114. Jarque, C, and A. Bera, 1987, Test for Normality of Observations and Regression Residuals, Interna¬tional Statistical Review, 55, 163-172. Johansen, S., 1988, Statistical Analysis of Cointe¬grated Vectors, Journal of Economic Dynamics and Control, 12,231-254. Johansen, S., and K. Juselius, 1990, Maximum Likelihood Estimation and Inference on Cointe-gration with Application to the Demand for Money, Oxford Bulletin of Economics and Sta¬tistics, 52, 169-210. Kasa, K., 1992, Common Stochastic Trends in International Stock Markets, Journal of Mone¬tary Economics, 29, 95-124. Knif, J., and S. Pynnonen, 1999, Local and Global Price Memory of International Stock Markets, Journal of International Financial Markets, Institutions and Money, 9, 129-147. Kwan, A. C. C, A. H. B. Sim, and J. A. Cotsomitis, 1995, The Causal Relationships Between Equity Indices on World Exchanges, Applied Econom¬ics, 27, 33-37. Liu, X, Burridge, P. and Sinclair P.(2002) Relationship between economic growth, foreign direct investment and trade: evidence from China, Applied Economics, 34, 1433-1440 Liu, X. and Romilly, P. (1997) An empirical investigation of the causal relationship between openness and economic growth in China, Applied economics, 29, 1679- 86. Lo, A., and C. MacKinlay, 1990, An Econometric Analysis of Nonsynchronous Trading, Journal of Econometrics 45, 181-211. Lucas, A., 1997, Strategic and Tactical Asset Allo¬cation and the Effect of Long-run Equilibrium Relations, Research Memorandum, 1997-42, Vrije Universiteit, Amsterdam. MacKinnon, J., 1991, "Critical Values for Cointe¬gration Tests," chapter 13 in Engle and C. W. J. Granger (eds.), Long-run Economic Relation¬ships: Readings in Cointegration, Oxford Uni-versity Press. MacKinnon, J., 1996, Numerical Distribution Func¬tions for Unit Root and Cointegration Tests, Journal of Applied Econometrics, 11, 601-618. MacKinnon, J., A. A. Haug, and L. Michelis, 1999, Numerical Distribution Functions of Likelihood Ratio Tests for Cointegration, Journal of Applied Econometrics, 14, 563-577. Malliaris, A. G., and J. Urrita, 1992, Journal of Financial and Quantitative Analysis, 27(3), 353-364. Osterwald-Lenum, M., 1992, A Note with Quan-tiles of Asymptotoc Distribution of the Maxi-mum Likelihood Cointegration Rank Test Statis¬tics, Oxford Bulletin of Economics and Statistics, 54, 461^72. Pan, M. S., Y. A. Liu, and H. J. Roth, 1999, Com¬mon Stochastic Trends and Volatility in Asian Pacific Equity Markets, Global Finance Journal, 10, 161-172. Roca, E., 1999, Short-term and Long-term Price Linkages Between the Equity Markets of Aus-tralia and its Trading Partners, Applied Financial Economics, 9,501-511. Roca, E., E. Selvanathan, and W. Shepherd, 1998, Are the ASEAN Equity Markets Interdependent? ASEAN Economic Bulletin, 15, 109-121. Smith, K. L., J. Brocato, and J. E. Rogers (1993), Regularities in the Data between Major Markets: Evidence from Granger Causality Tests, Applied Economics, 3, 55-60. Syriopoulos, T., 2003, Prospects for Portfolio Investments in Emerging European Stock Markets, paper presented on November 8th at the Second Annual Conference of the Hellenic Finance and Accounting Association, Athens, Greece. Wang, Xuelian, Essays on Risk Management and Dependence Across Stock Markets, a PhD Dissertation submitted at the Albany State University of New York, 2005.