A Dynamic Analysis of the Integration of the Australian Stock Market with Those of Its Trading Partners
30 Pages Posted: 28 Aug 2012
Date Written: August 27, 2012
This paper aims to investigate does foreign trade matter for the stock markets integration by segmenting Australian trade partners into three groups based on bilateral trade relations. We further explore time-varying correlations of pairwise stock market returns by employing asymmetric generalized DCC-GARCH models. Study uses weekly price index data from September 3rd, 1999 to May 4th, 2012. Empirical findings from cointegration tests show the presence of long-run relationship between Australia and its major trading partners in the pre-crisis and post-crisis (includes crisis-period). We also found the long-run relationship between Australia and its medium trading partners only in the post-crisis period. Granger non-causality test show the presence of bidirectional relationship between Australia and Singapore. Study also finds unidirectional relationship from Australia to China, Korea and the Philippines and from the USA, the UK and South Africa to Australia. Results from AGDCC-GARCH evidence that correlations are time-varying and increase significantly during the crisis period and revert close to their initial levels after the crisis. Further, we identified that the time-varying correlations of Australia with the USA, Korea and the Philippines are more volatile. Our findings confirm that foreign trade intensity matters for the stock market integration. The absence of stable long-run relationship may provide incentive for investors to include these markets into their portfolio selection process to exploit potential diversification benefits.
Keywords: Trade linkages, Stock market integration, Global financial crisis and AGDCC-GARCH models
JEL Classification: C32, G01, G15
Suggested Citation: Suggested Citation