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

See all articles by David E. Allen

David E. Allen

School of Mathematics and Statistics, The University of Sydney; Financial Research Network (FIRN); Department of Finance; School of Business and Law, Edith Cowan University

Lee Lim

School of Finance and Business Economics

Trent Winduss

Rothschild Australia

Date Written: March 2004

Abstract

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

Allen, David Edmund and Lim, Lee and Winduss, Trent, The Present Value of Pacific Basin Stock Markets: A Domestic and External Factor Model (March 2004). Edith Cowan U. Accounting Finance and Economics Working Paper No. 2004.1. Available at SSRN: https://ssrn.com/abstract=524583 or http://dx.doi.org/10.2139/ssrn.524583

David Edmund Allen (Contact Author)

School of Mathematics and Statistics, The University of Sydney ( email )

School of Mathematics and Statistics F07
University of Sydney
Sydney, New South Wales 2006
Australia

HOME PAGE: http://www.maths.usyd.edu.au

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Department of Finance ( email )

Taiwan
Taiwan

School of Business and Law, Edith Cowan University

100 Joondalup Drive
Joondalup, WA 6027
Australia

HOME PAGE: http://www.dallenwapty.com

Lee Lim

School of Finance and Business Economics ( email )

100 Joondalup Drive
Joondalup, WA 6027
Australia

Trent Winduss

Rothschild Australia ( email )

Australia

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