Bwo-Nung Huang

Causality and cointegration of stock markets among the United States, Japan and the South China Growth Triangle

Abstract This paper explores the causality and cointegration relationships among the stock markets of the United States, Japan and the South China Growth Triangle (SCGT) region. Applying the recently advanced unit root and cointegration techniques that allow for structural breaks over the sample period (October 2, 1992 to June 30, 1997), we find that there exists no cointegration among these markets except for that between Shanghai and Shenzhen. By invoking the Granger causality test and considering the non-synchronous trading problem, we will show that stock price changes in the US have more impact on SCGT markets than do those of Japan. More specifically, price changes in the US can be used to predict those of the Hong Kong and Taiwan markets on next day. Similarly, price changes on the Hong Kong stock market lead the Taiwan market by 1 day. Furthermore, the stock returns of the US and Hong Kong markets are found to be contemporaneous. Finally, there is a significant feedback relationship between the Shanghai and the Shenzhen Stock Exchanges.

An analysis of factors affecting price volatility of the US oil market

Abstract This paper studies the price volatility of the crude oil market by examining the market structure of OPEC, the stable and unstable demand structure, and related elasticity of demand. In particular, the impacts of prosperity and recession of the world economy and the resulting demand shift on crude oil price are investigated. The error correction model is used to estimate the demand relations and related elasticity. The income effect on demand functions is evaluated to shed light on future prices. A simulation of potential oil prices under different scenarios on a cut of one million barrels per day by OPEC is evaluated. From our simulation, given the 4% cut in OPEC production, the oil price is expected to increase unless the recession is severe. The magnitude and scope of a price hike would be diminished if non-OPEC or domestic production were greatly expanded.

Do Asian stock market prices follow random walks? Evidence from the variance ratio test

Using a basis of the variance ratio statistics with both homoscedastic and hetero-scedatic error variances (Lo and Mackinlay, 1988) the random walk hypothesis of the Asian stock markets is tested. Of the developed and emerging markets, it is found that the random walk hypothesis for the markets of Korea and Malaysia is rejected for all different holding periods. In addition, the random walk hypothesis is also rejected for the Hong Kong, Singapore, and Thailand markets using the heteroscedasticity-consistent variance ratio estimator

Causality in volatility and volatility spillover effects between US, Japan and four equity markets in the South China Growth Triangular

Abstract In examining co-movement across international stock markets, previous researchers usually pre-determine the direction of causation and neglect the Chinese equity markets. In this study, we examine the spillover effects of volatility among the two developed markets and four emerging markets in the South China Growth Triangular using Chueng and Ngs causality-in-variance test. Several findings deserve mention: (1) the Japanese stock market affects the US stock market and there is a feedback relationship between the Hong Kong and US stock market. (2) Markets of the SCGT are contemporaneously correlated with the return volatility of the US market. (3) Econometric models constructed according to the results of variance-in-causality tests have greater explanatory power than the conventional GARCH(1,1) model. (4) Using the return volatility of foreign exchange as a proxy for informational arrival can explain excess kurtosis of a stock return series, especially for the less open emerging market. (5) Geographic proximity and economic ties do not necessarily lead to a strong relationship in volatility across markets.

An analysis of industry and country effects in global stock returns: evidence from Asian countries and the U.S.

Abstract This paper estimates a factor model for 7 equity markets and 22 industrial group returns indexes from January 1990 to February 2001 to measure the relative importance of industry and country effects. Our results indicate that industry effects have significantly dominated country effects since 1999 and that country effects tend to exhibit a cyclical trend. In addition, we investigate the impact of the U.S. and Japan on the other Asian countries under study. Significant evidence indicates that Japan has had a greater impact than the U.S. on these countries. From the viewpoint of industries, the industry effects of current mainstream industries such as computer software, electronics, semiconductors, telecommunications-wireless and telecommunications equipment have apparently dominated those of traditional industries such as textiles and leather and steel.

The fractal structure in multinational stock returns

The essence of fractal analysis is seeking for a pattern that is independent of scale. This paper examines the existence of long-term memory in nine Asian stock markets together with US and UK indices using the modified rescaled-ranged (R/S) statistic. The modified R/S statistic is robust not only with respect to the normality assumption,but also to short-term autocorrelation. The data in the sample range from 1 January 1988 to 30 June 1992 and are arranged in daily, weekly and monthly returns. In most cases, the phenomenon of long-term memory is not found; hence the random walk hypothesis cannot be rejected.The UK market, however, exhibits some long-term memory for various data frequencies and lags. The result of this paper provides directions for future research.

Defense spending and economic growth across the Taiwan straits: a threshold regression model

This paper employs both linear and non‐linear models to investigate the relationship between national defense spending and economic growth for Taiwan and China. Using data from 1953–2000 on defense spending, GDP, import, export and capital, we find that Chinas defense spending leads that of Taiwan. There exists the phenomenon of an arms race between both countries when official Chinese data are used. On the one hand, feedback relations prevail between economic growth and defense spending growth in Taiwan. On the other hand, Chinas national defense is found to lead economic growth.

Long-run purchasing power parity revisited: a Monte Carlo simulation

The existence of long-run purchasing power parity (PPP) implies that a cointegration vector of nominal exchange rate, domestic price, and foreign price is expected regardless of using the Engle-Granger two-step method or Johansen maximum likelihood approach. However, this paper has found conflicting results: the Engle-Granger technique tends to reject the long-run PPP hypothesis whereas the Johansen method is generally supportive of long-run PPP. Via Monte Carlo simulations, the present paper finds that the Johansen approach has a bias toward supporting long-run PPP especially under the circumstances in which the assumption of normally or/and independently and identically distributed disturbance terms is violated.

An empirical investigation of trading volume and return volatility of the Taiwan Stock Market

Abstract This study examines the Mixed Distribution Hypothesis (MDH) using 5-min interval stock returns of the Taiwan Stock Index (TSI). Startlingly enough, the persistence of stock volatility remains dominant after the stochastic mixing variable was included in the variance equation. It implies that the MDH cannot explain away the ARCH phenomenon. We have found that the composition of participants (approximately 92% of participants are individual investors) in TSI is a major contributing factor to the persistent volatility. In addition, the existence of limits on price changes, to some extent, accounts for the persistence phenomenon. Similar results are also found for individual stocks in the sample. Interestingly enough, the explanatory power of trading volume exhibits a U-shaped pattern in explaining return volatility in Taiwan Stock Market.

ON THE RELATIONSHIP BETWEEN MILITARY EXPENDITURE, THREAT, AND ECONOMIC GROWTH: A NONLINEAR APPROACH

The main objective of the paper is to decipher the military expenditure–economic growth relationship, taking the level of economic development (income) into consideration. Our findings suggest the following: (i) military expenditure has a significantly negative relationship to economic growth for the 23 countries with initial incomes (threshold variable) less than or equal to