The Present Value of Pacific Basin Stock Markets: A Domestic and External Factor Model
Edith Cowan U. Accounting Finance and Economics Working Paper No. 2004.1
34 Pages Posted: 1 Jul 2004
Date Written: March 2004
The purpose of this study is to investigate whether current and future domestic and international macroeconomic variables can explain long and short run stock returns in Pacific-basin countries. The countries examined include Australia, Japan, Korea, Malaysia, New Zealand and Singapore, whilst America is included as a "foreign influence". The long run relationship tested in this study is based on the present value model of stock prices, which is tested using the complete range of cointegration and causality tests. These include the Johansen ML test, Long Run Structural Modelling, a Vector Error Correction Model and Variance Decomposition. Typically it is found that Pacific-Basin stock markets are neither perfectly integrated with foreign financial markets nor are they perfectly segmented. A present value model based on domestic and external economic variables can be estimated for each Pacific-Basin stock market examined. Consistent with our priors: American economic activity has a significant influence on Pacific-Basin stock markets in the long run but was surprisingly less influential than domestic economic activity.
Keywords: Cointegration, stock returns, present value model, Pacific-Basin markets
JEL Classification: G10, G12
Suggested Citation: Suggested Citation