Nicolaas Groenewold

The dynamic interrelationships between the greater China share markets

This paper investigates the interrelationships between prices on the mainland Chinese share market and those in the neighbouring markets of Hong Kong and Taiwan. While there is a growing literature on interrelationships between share market including the emerging markets in Asia, very little is known about the role of mainland markets in the region. We consider the interrelationships between the Shanghai and Shenzhen exchanges and those in Hong Kong and Taiwan. We begin by combining the Shanghai and Shenzhen price indexes into a single value-weighted index and investigating its relationship to the indexes for Hong Kong and Taiwan. We find that the mainland markets are relatively isolated from the other two markets considered, although after the Asian crisis there is evidence that Hong Kong has weak predictive power for returns in the mainland. Hong Kong also clearly Granger-causes Taiwan although the reverse is not true. Both Hong Kong and Taiwan have strong contemporaneous relationships, a feature which is more market after the Asian crisis. We also analysed the two mainland markets separately, both by themselves and with Hong Kong. We found some predictability of thes prices in one market on the basis of lagged prices in the other although this was less apparent after the Asian crisis. Both before and after 1997, there were strong contemporaneous relationships between the two mainland markets, vindicating our earlier decision to treat them as a single market.

Time-varying estimates of CAPM betas

It is well known that the CAPM beta is not stable over time. We investigate the nature of the time-variation in betas using monthly Australian data from 1979 to 1994 for 23 sectors. We discuss beta estimates for sub-periods and tests of the statistical adequacy of the market model used to estimate the betas. We estimate time-varying betas using recursive regressions, rolling regressions and using the Kalman Filter. We find considerable time-variation in the estimated betas and find that many are non-stationary. We estimate a simple model which explains the variation in each of the betas in terms of a time trend, allowing for a break both in level and in trend at October 1987. The model explains a large proportion of the variation in the betas over the sample period for most of the sectors.

The efficiency of the Chinese stock market and the role of the banks

Abstract This paper examines the weak market efficiency and the role of the banks in the Chinese stock market. We consider both A and B shares traded on the Shanghai and Shenzhen stock exchanges using daily data for seven indexes for the period 1992–2001. We begin by an examination of the weak EMH and find evidence of departures from weak efficiency in the form of predictability of returns on the basis of their own past values. Over the period as a whole this was most marked for the B shares in both the exchanges and absent altogether in the index for the 30 leading stocks on the Shanghai market, suggesting that previously reported predictability may simply reflect thin trading. We go on to examine whether the efficiency was affected when banks were excluded from the stock market in 1996 and subsequently re-admitted in early 2000. We find that efficiency tended to be adversely affected when the banks were excluded.

The Effects of De-Regulation on Share-Market Efficiency in the Asia-Pacific

Emerging markets have been the fastest growing share markets in the past decade. There are 58 emerging markets. Yet, little is know about their efficiency compared to the vast body of results on efficiency of the developed markets. Little is also known of the way in de-regulation of emerging financial market affects efficiency. This Paper use daily closing values for share-price indexes for ten countries in the Asia-Pacific to assess the effect on market-efficiency of liberalisation of both the domestic capital-market regulation and the in the openness to international financial flows. We find that several measures of market-efficiency are unaffected by de-regulation while measure based on regression and autocorrelation point to greater predictability (both domestically and internationally) after de-regulation. This counter-integration of international capital markets. The domestic phenomenon remains a puzzle, however.

US Stock Prices and Macroeconomic Fundamentals

Using 54 years of quarterly data and a VAR model underpinned by a theoretical framework describing the relationship between US stock prices and the macroeconomy, this paper analyses the extent to which US stock prices deviate from economy-wide fundamentals. Focusing on real output and using a present value approach, we derive the fundamental price-output ratio and the fundamental stock price under different assumptions regarding the time-variability of returns, and proceed to compare these to actual data. Despite differences between model results, all imply that since 1996, the stock market, relative to other periods in history, has been overvalued compared to its value warranted by the expected growth in output.

Fundamental share prices and aggregate real output

This study analyses the interrelationships between the share market and the macroeconomy within the framework of a structural vector autoregressive (SVAR) model. The model has just two variables – real share prices and real output – and uses a distinction between temporary and permanent shocks to identify macroeconomic and share market-shocks. The identification of the SVAR is based on a simple theoretical model of the two-way linkage between output and share prices. In one direction a version of the net-present-value model is used and in the other direction the wealth effect is relied on as the basis for the influence of share prices on output. The estimated model is used to examine the dynamic interaction between the two variables. The study goes on to use it to compute a fundamental share-price series based on the assumption that fundamentals are driven by real macroeconomic forces.

Measuring industry importance: an Australian application

The focus of this paper is an empirical examination of the importance of an industry in terms of its contribution to regional employment. It uses a closed input-output model. Four alternative measures of importance are presented and explored in the framework of a 58-industry input-output model of the Australian State of Tasmania. The four measures are compared to each other, to direct employment and to a multiplier-based rule-of-thumb. Our preferred measure is one which takes into account both direct effects and the strength of backward linkages. The rule-of-thumb is found to be highly correlated to this measure.

Stock Returns and Inflation: A Macro Analysis

A negative relationship between stock returns and (expected) inflation is frequently observed in empirical work and is considered a puzzle since it is expected that stocks are a good hedge against inflation, so that their real rate of return (actual or expected) ought to be unaffected by changes in inflation. Various attempts have been made to resolve this puzzle empirically but have tended to use single equations of a partial equilibrium nature which have been ad hoc to a greater or lesser extent. This paper examines the puzzle in the framework of a small empirical macroeconomic model. The negative sign survives the extension to the full model and the source of the puzzle is found in the macroeconomic interactions: a rise in the expected inflation rate raises equilibrium real output which has a negative impact on stock returns.

Killing the Goose that Lays the Golden Egg: Institutional Change and Economic Growth in Hong Kong

This article examines how the rule of law and democratic accountability have affected Hong Kongs Gross Domestic Product (GDP) growth rate in the past 20 yr. We find that democratic accountability has deteriorated substantially since the changeover of sovereignty in 1997, while the rule of law has remained strong and stable. Empirical results from autoregressive distributed lag bounds tests show a positive long-run relationship between growth and democratic accountability, and Granger causality tests reveal that democratic accountability causes the growth rate of GDP in the short run. These conclusions are robust to control for the effects of investment and the Asian financial crisis in 1997.

Tests of asset-pricing models: how important is the iid-normal assumption?

Abstract Financial data are typically not iid-normal. Yet standard tests of asset-pricing models are based on this assumption. We address the question of how sensitive the tests are to violations of iid-normality and use Australian data to compare the standard test results with those of the GMM-based J test and bootstrap-based tests. We find that, in contrast to US evidence, standard test results are robust to the iid-normality assumption. This is true for all tests and for all three asset-pricing models analysed.