Venus Khim-Sen Liew

Statistical Inadequacy of GARCH Models for Asian Stock Markets Evidence and Implications

This study employs the Hinich portmanteau bicorrelation test (Hinich 1996; Hinich and Patterson 1995) as a diagnostic tool to determine the adequacy of Generalised Autoregressive Conditional Heteroscedasticity (GARCH) models for eight Asian stock markets. The bicorrelation test results demonstrate that this type of model cannot provide an adequate characterisation for the underlying process of all the selected Asian stock markets. Further investigation using the windowed test procedure reveals that the violation of the covariance stationarity assumption as required by the GARCH process is due to the presence of transient epochs of dependencies in the data. The inadequacy of GARCH models has strong implications for the pricing of stock index options, portfolios selection, development of optimal hedging techniques and risk management.

Nonlinear mean reversion in stock prices: evidence from Asian markets

Utilizing the standard linearity test of Luukkonen et al. (1988), the linear nature of all the Asian stock indices has been formally rejected. This finding warrants use of the nonlinear stationary test of Kapetanois et al . (2003), which is also constructed in the STAR framework, to investigate the mean reverting property of the stock prices series. As a whole, this study not only found convincing evidence of a nonlinear mean reverting pattern in all the Asian stock indices, but also demonstrates the risk of drawing the wrong inferences on mean reversion when the ADF test is applied to data governed by nonlinearity.

Does the US IT Stock Market Dominate Other IT Stock Markets? Evidence from Multivariate GARCH Model

Utilizing multivariate GARCH framework, this study finds that generally the US Information Technology (IT) market contributes a strong volatility rather than mean spillover effect to non-US IT markets, implying that the US IT market plays a dominant role in affecting the volatility of world IT markets. However, our further analysis of the dynamic path of correlation coefficients reveals that the strong relationship between US and non-US IT markets had weakened after the burst of the IT bubble.

Long-run validity of purchasing power parity and rank tests for cointegration for Central Asian countries

This study finds that Purchasing Power Parity (PPP) holds in the long-run for Azerbaijan, Kazakhstan and Kyrgyzstan, based on Breitungs (2001) rank tests for cointegration. Results from further analysis indicates that nominal exchange rates and relative prices are nonlinearly interrelated. Trade barriers, transportation costs and government intervention in the pricing system in these countries may have resulted in the establishment of the above-mentioned nonlinear relationship.

THE REAL INTEREST RATE DIFFERENTIAL: INTERNATIONAL EVIDENCE BASED ON NON-LINEAR UNIT ROOT TESTS

This paper aims at testing international parity conditions by using nonlinear unit root tests advocated by Kapetanios et al. (2003, KSS). Results from the KSS tests based on 17 countries (G7 and 10 Asian countries) overwhelmingly show that the adjustment of real interest rates towards the RIP follows a nonlinear process except for the Malaysian relationships with both the US and Japan. Overall, the empirical results are in favor of RIP using the US and Japan as the center countries but only if nonlinearities are accounted for in the data generating process. Our findings confirm that interest rate differentials, like the real exchange rates reported in recent literature, display a nonlinear mean reversion process.

Real interest rate parity in the ASEAN-5 countries: a nonlinear perspective

This article aims at testing real interest parity (RIP) by using nonlinear unit root tests. The results from Kapetanios et al. (2003) demonstrated that the adjustment of ASEAN-5 real interest rates towards real interest rates in Japan and the US follows a nonlinear (stationary) process. Overall, the evidence is in favour of RIP.

On Singaporean Dollar-U.S. Dollar and Purchasing Power Parity

This study re-examines the validity of the relationship between the Singapore dollar–U.S. dollar exchange rate and relative prices using the latest econometric methodologies that account for non-linearity. Among others, this study finds Exponential Smooth Transition Autoregressive (ESTAR)-type non-linear mean-reverting adjustment process of the nominal Singapore dollar–U.S. dollar rate towards the consumer price index ratio. Unlike previous findings of a linear cointegration relationship between the nominal Singapore dollar–U.S. dollar exchange rate and consumer price index ratio, this study shows that the relationship is in fact non-linear in nature. The major economic implications of our findings are: (1) policy makers need to take non-linearity into consideration in their policy decisions; (2) the Monetary Authority of Singapore (MAS) is able to maintain the macroeconomic equilibrium despite the authoritys strong dollar policy; and (3) one should keep track of Singapores monetary policy and other innovations in aggregate demand in order to closely monitor the movement of the Singapore exchange rate.

Testing rational expectations hypothesis in the manufacturing sector in Malaysia

The application of rational expectations hypothesis (REH) in macroeconomic research has marked a revolution in economic thinking, and the magnitude of its impact on the world of economics is undeniably significant. However, the extent to which REH applies in real-world settings is ambiguous even though the concept of REH is well established in economics literature because empirical evidence from previous studies is clearly mixed. This study used survey data on gross revenue and capital expenditures to examine the validity of REH in Malaysian manufacturing business expectations. Empirical results indicated that the manufacturers’ expectations are being irrationally constructed in terms of gross revenue predictions but comply with REH properties in Muths sense in the case of capital expenditures forecasts. Therefore, manufacturing firms in Malaysia are encouraged to incorporate more relevant information into their gross revenue predictions to provide more accurate and realistic forecasting.

Non-linearities in Real Interest Rate Parity: Evidence from OECD and Asian Developing Economies

Abstract This paper investigates the validity real interest rate parity (RIP) for a sample of 19 OECD and Asian developing economies. The distinction of this paper is that we exploit both linearity and non-linear unit root tests as advocated by Dufrénot et al. (Applied Economics, 38, pp. 203–229, 2006) to validate the parity. The major finding are: (i) the alignments from real interest rate differentials (RIDs) are corrected in a non-linear fashion and that the adjustments is asymmetric in both size and speed; (ii) that RIP holds for the developed and developing countries; and (iii) the empirical results are invariant with respect to the US, Japan or Germany as the centre country.

Forecasting Malaysian Business Cycle Movement

For years, economists have sought to summarize the visual evidence of cyclical oscillation in economic series to learn the characteristics of such cycles in real macroeconomic settings. The existence of various business cycle conceptions indeed shared a single objective, that is, to strengthen insight into the underlying thoughts behind recurring ups and downs in economic activity (Burns & Mitchell, 1946). However, the cyclical fluctuations in economic activity hardly follow a predictable pattern, as the size of expansion and contraction deviate across periods, each turning point in the business cycle presents certain crucial information that contains indications on future changing phases of the economy. Also, development in leading indicator analysis persuasively suggests that combinations of sets of leading series to form a unique composite index is generally better than any single series in explaining the cyclical movement.