Causal Analysis of the Major Factor Influencing the Euro and its Impact on the Hong Kong Stock Market

22 Pages Posted: 18 Apr 2001

See all articles by Tim Brailsford

Tim Brailsford

Bond University

Jack H.W. Penm

Australian National University - School of Finance and Applied Statistics, Faculty of Economics and Commerce

R. Deane Terrell

Australian National University (ANU) - National Graduate School of Management

Date Written: undated

Abstract

With the introduction on 1 January 1999 of the European single currency, the Euro has become the second most widely used currency at the international level, behind the US dollar and ahead of the Japanese yen. However the scenario for a strong Euro has yet to eventuate.

Over the test period January 1999 to October 2000 the Euro's weakness confounded earlier general expectations that it would trend upwards relative to the US dollar [see ECB(2000)]. Money supply in the Euro area is measured by the standard stock of money (M3). Since the average annual growth rate of M3 - 5.1% for three-month average over April to June 1999 - is higher than the reference value of 4.5% set by the Governing Council of the European Central Bank [see ECB(1999)], and so M3 exceeds the ECB benchmark for that period.

In this paper the zero-non-zero (ZNZ) patterned vector autoregressive (VAR) modelling, using the pre-windowed approach, has been utilised to investigate direct Granger causal relations between M3 and the Euro exchange rate with the US dollar. The Granger causality testing was undertaken for periods commencing in January 1999. The five consecutive tests were carried out for periods ending in July 2000 through to October 2000. It is found that M3 directly influences the Euro. Further, movements in the way the Euro exchange rate with the US dollar influences M3 are detected at T=20 and 21, suggesting a structural change which corresponds to the September-October period is identified. It is interesting to note that the European Central Bank announced its first intervention in the Euro exchange2 markets on 22 September 2000 [see ECB(2000)]. This intervention is consistent with the outcome of the structural change identified in this analysis.

This paper also utilises the ZNZ patterned VAR modelling to investigate the Euro's impact on the Hong Kong stock market during 1999. The Granger causality testing was conducted in a vector system comprising economic and financial variables from the relevant markets. The results show that the Euro exchange rate provides leading information for the other components in the system in the Hong Kong stock market.

Keywords: Causal relation analysis, the Euro exchange rate with the US dollar, zero-non-zero patterned time-series modelling

Suggested Citation

Brailsford, Timothy John and Penm, Jack and Terrell, R. Deane, Causal Analysis of the Major Factor Influencing the Euro and its Impact on the Hong Kong Stock Market (undated). Available at SSRN: https://ssrn.com/abstract=267289 or http://dx.doi.org/10.2139/ssrn.267289

Timothy John Brailsford

Bond University ( email )

Gold Coast, QLD 4229
Australia

HOME PAGE: http://www.bond.edu.au

Jack Penm (Contact Author)

Australian National University - School of Finance and Applied Statistics, Faculty of Economics and Commerce ( email )

Canberra, Australian Capital Territory 0200
Australia
+61 (02) 61250535 (Phone)
+61 (02) 61250087 (Fax)

R. Deane Terrell

Australian National University (ANU) - National Graduate School of Management ( email )

Sir Roland Wilson Building (120)
Canberra, Australian Capital Territory 0200
Australia

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