A Dynamic Analysis of the Integration of the Australian Stock Market with Those of Its Trading Partners

30 Pages Posted: 28 Aug 2012

See all articles by Sudharshan Reddy Paramati

Sudharshan Reddy Paramati

University of Dundee; affiliation not provided to SSRN

Rakesh Gupta

Griffith University - Griffith Business School; CQ University; Association of Personal Finance and Investments

Eduardo Roca

Griffith University

Date Written: August 27, 2012

Abstract

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

Paramati, Sudharshan Reddy and Paramati, Sudharshan Reddy and Gupta, Rakesh and Roca, Eduardo, A Dynamic Analysis of the Integration of the Australian Stock Market with Those of Its Trading Partners (August 27, 2012). 25th Australasian Finance and Banking Conference 2012, Available at SSRN: https://ssrn.com/abstract=2136962 or http://dx.doi.org/10.2139/ssrn.2136962

Sudharshan Reddy Paramati (Contact Author)

University of Dundee ( email )

Dundee, Scotland DD1 4HN
United Kingdom
0138284845 (Phone)
DD1 4HN (Fax)

affiliation not provided to SSRN

Rakesh Gupta

Griffith University - Griffith Business School ( email )

Brisbane, Queensland 4111
Australia
+61 7 37357593 (Phone)
+61 7 3735 3719 (Fax)

CQ University ( email )

B-33, G-26
Fabie
North Rockhampton, QLD 4701
Australia
+61 7 4930 9158 (Phone)

Association of Personal Finance and Investments

Bruce Highway
Rockhampton
Australia
61749309158 (Phone)

Eduardo Roca

Griffith University ( email )

170 Kessels Road, Nathan
Queensland
Brisbane, 4111
Australia
(07) 373 57583 (Phone)

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