Doctoral thesis of philosophy integration of asean5 equity markets, gdp and trade and their relationships with asset pricing

The Integration of ASEAN5 Equity Markets, GDP and Trade and their Relationships with Asset Pricing A thesis submitted in fulfilment of the requirements for the degree of Doctor of Philosophy Zarina Md Nor B.A (Hons) Management, MBA School of Economics, Finance and Marketing RMIT University March 2009 DECLARATION I certify that except where due acknowledgement has been made, the work is that of the author alone; the work has not been submitted previously, in whole or in part, to qualify for any other academic award; the content of thesis is the result of work which has been carried out since the official commencement date of approved research program; and any editorial work, paid or unpaid, carried out by a third party is acknowledged Signed: Zarina Md Nor March 2009 ii ACKNOWLEDGEMENTS The completion of this thesis marked the end of my journey as a PhD student in this beautiful city of Melbourne, Australia After spending almost four years of invaluable learning and life experiences, I realize that I have come so far to be what I am today As such, it is an honour for me to acknowledge contributions, support, encouragement, and love that I have received in abundance, from beautiful people around me in Australia and from Malaysia I would like to start by thanking my sponsors, the Malaysian government and University Sains Malaysia, for awarding me a second chance to this life-changing opportunity Without their sponsorship, I would not be here in the first place This opportunity has given me a chance to serve my beloved country from a better platform My deepest gratitude and respect to my main supervisor, Professor Richard A Heaney, for his unending patience, guidance and encouragement throughout my time as his student “I am blessed to be one of your students, Sir I learned so much from you and my gratitude is beyond words” I would like to thank my second supervisor, Dr George Tawadros, for his valuable opinions and comments on my thesis To my consultant and a dear friend, Associate Professor Dr Heather Mitchell, my heartfelt appreciation to her for allowing me to attend her econometric classes, her assistance, and for being such an inspiring person too I would like to thank Sam Oliphant for providing me with her professional editing service Her 30 years of editing experience helps to ensure the completeness and consistency of my thesis To my beloved mother Hjh Minah binti Jantan, and my father, Hj Md Nor bin Jaiman, I indebted my life to them They had shown me how important is education in ones life when they hadn’t got that chance themselves My mother, a strong woman she was, had taught me to be a survivor and a fighter How I wish they were still around to share my life and to be proud of their only daughter To my beautiful daughter, Zahirah Eizzaty, who has been my rock since the day she was born, I am so blessed to have her by my side Her smile, her laugh and her tears, I cannot live without “Thank you Darling, for your hugs and kisses when Mummy needs one” A lot of love to my brother, Mohd Zaini, and his family for their sacrifices and always be there for me I extend my love and gratitude to my iii extended family members, who have showered me with their prayers for my success, in particular to my uncle, Hj Md Yasin Saleh, and my aunts, Hjh Maimunah Ismail, Hjh Alimah Ahmad and Che Wa Jaiman True friendship is scarce, but throughout my life, I have been blessed by so many good friends, and come to know good people whom had accepted me as I am They trust me when I doubt myself, they giving me hope when I seem to lose one and they give me love to keep on fighting All of them hold a dear place in my heart While all of them are special, I will not be able to name them all here though I would like to convey my warmest gratitude to Zubaidah Mohd Sultan, Murzi Ibrahim, Aniza Abu Hassan, Dr Fadzilah Amzah, Bahiyah Omar, and their respective families, Pn Hassnah Ishak, Dr Azizah Omar, Pn Suhaida Kamalul Arifin, and Pn Suriati Shariff My heartfelt gratitude also goes to Dr Aznan Ahmad A special thank to Mr Michael Gardner for giving me a chance to work at his shop (Uniphone) and for being a family friend too A special note to my dear friends that I had come to know in Australia, Jeffery, Frieda, Mamiza, Shams, Silvia, Noo, Hoa, Ahmed and Rachel I really cherish the friendship that they have been sharing with me through happiness and sorrow I love you all and we will keep this friendship alive even though we are thousands of miles away Above all, “ALHAMDULILLAH” to the Almighty Allah for all His blessings iv TABLE OF CONTENTS Chapter INTRODUCTION 1.1 Introduction 1.2 Contributions of the thesis 1.3 Research motivation 1.4 Objectives of the study 1.5 Thesis structure Chapter LITERATURE REVIEW 2.1 Introduction 2.2 International equity market linkages 2.3 Literature on GDP 10 2.4 Literature on trade links 11 2.5 Literature on asset pricing 14 2.6 Chapter summary 21 Chapter 22 METHODOLOGY 22 3.1 Introduction 22 3.2 Unit root tests 22 3.3 Tests for cointegration 23 3.4 Asset pricing 25 3.4.1 Models 25 3.4.2 Portfolio formation 26 3.5 Asset pricing and macro factors 26 3.6 Chapter summary 28 Chapter 29 DATA 29 4.1 Introduction 29 4.2 Data for ASEAN5 equity markets 29 4.3 Data for ASEAN5 GDP 30 4.4 Data for ASEAN5 trade 31 4.5 ASEAN5 asset pricing 32 4.6 Chapter summary 32 Chapter 33 ASEAN5 EQUITY MARKET LINKAGES 33 5.1 Introduction 33 5.2 Results and discussion 36 5.2.1 Statistical characteristics of the series 36 5.2.2 Unit root tests 41 5.2.3 ASEAN5 cointegration tests 43 5.2.4 The vector error correction models (VECMs) 46 5.3 Conclusion 54 v Chapter 56 ASEAN5 GDP LINKS 56 6.1 Introduction 56 6.2 Results and discussion 58 6.2.1 Statistical summary 58 6.2.2 Unit root tests 64 6.2.3 Cointegration test 67 6.2.4 Vector error correction models (VECMs) 71 6.2.5 Implication of the results 77 6.3 Conclusion 77 Chapter 79 ASEAN5 TRADE 79 7.1 Introduction 79 7.2 ASEAN5 trade characteristics 81 7.2.1 Intra-ASEAN5 trade 81 7.2.2 Intra-ASEAN5 trade relative to each ASEAN5 member’s global trade 84 7.2.3 Percentage of each member’s intra-ASEAN5 trade relative to total intraASEAN5 trade 87 7.2.4 Percentage of ASEAN5 trade relative to world trade 89 7.3 Results and discussion 91 7.3.1 Statistical characteristics of the series 91 7.3.2 Unit root tests 99 7.3.3 Cointegration test 104 7.3.4 Vector error correction models (VECMs) 108 7.4 Conclusion 123 Chapter 125 ASEAN5 ASSET PRICING FOR SIZE-BTME AND INDUSTRY PORTFOLIOS 125 8.1 Introduction 125 8.2 Summary statistics for variables 126 8.2.1 Malaysia 126 8.2.2 Singapore 128 8.2.3 Thailand 129 8.2.4 Indonesia 130 8.2.5 Philippines 131 8.2.6 Correlation matrix 132 8.3 Regression analysis 133 8.3.1 Malaysia 133 8.3.2 Singapore 137 8.3.3 Thailand 141 8.3.4 Indonesia 144 8.3.5 Philippines 147 8.3.6 Robustness tests 150 8.3.7 Section summary 152 8.4 Conclusion 153 vi Chapter 154 ASEAN5: ASSET PRICING AND MACRO FACTORS 154 9.1 Introduction 154 9.2 Additional data 155 9.3 Correlations of the explanatory variables 156 9.4 Multifactor regression results 158 9.4.1 Malaysia 159 9.4.2 Singapore 161 9.4.3 Thailand 163 9.4.4 Indonesia 165 9.4.5 Philippines 167 9.5 Regressions of the four-factor models with single macro factors 169 9.5.1 Macro factors for Malaysia 169 9.5.2 Macro-factor models for Singapore 169 9.5.3 Macro-factor models for Thailand 173 9.5.4 Macro-factor models for Indonesia 175 9.5.5 Macro-factor models for the Philippines 177 9.5.6 Robustness tests 179 9.5.7 Section summary 181 9.6 Conclusion 182 Chapter 10 183 CONCLUSION 183 10.1 Introduction 183 10.2 Limitations of study 185 10.3 Suggestions for further studies 186 vii LIST OF TABLES List of Tables for Chapter Table - Descriptive statistics of market returns 37 Table - Correlation matrix of equity market returns 38 Table - Autocorrelations 40 Table - Unit root tests 42 Table - Johansen’s cointegration test results 44 Table - Speed of adjustment parameters for ASEAN5 VECMs 46 Table - Temporal causality results for ASEAN5 47 Table - Speed of adjustment parameters for ASEAN5 + USA + Japan + Australia 49 Table - Speed of adjustment parameters for ASEAN5 + Japan and Australia + US returns (as an exogenous variable) 50 Table - 10 Temporal causality for ASEAN5, US, Japan and Australia 51 Table - 11Temporal causality for ASEAN5 + Japan and Australia + US returns (as an exogenous variable) 53 List of Tables for Chapter Table - Descriptive statistics of GDP growth 58 Table - Correlations of GDP growth 61 Table - Autocorrelation of log GDP at levels and 1st differences 63 Table - Unit root tests for GDP in real USD 65 Table - Unit root tests for GDP in nominal USD 66 Table - Cointegration tests for real and nominal GDP with no adjustment for seasonal or crash effects 69 Table - Cointegration tests for real and nominal GDP with seasonal and crash period adjustment 70 Table - VECM: Speed of adjustment 71 Table - Temporal causality from VECMs for real GDP 73 Table - 10 Temporal causality from VECMs in nominal GDP 75 List of Tables for Chapter Table - Correlation between intra-ASEAN5 real imports and exports 82 Table - Share of each member’s intra-ASEAN5 trade relative to their total trade 85 Table - Each member’s average trade share of total intra-ASEAN5 trade 87 Table - ASEAN5 average import and export share of global trade 90 Table - Descriptive statistics 92 Table - Correlation matrices 95 Table - Autocorrelations .97 Table - Unit root tests 100 Table - Unit root test: ADF with seasonal and crisis period adjustment 103 Table - 10 Cointegration test between imports and exports for each ASEAN5 member 105 Table - 11 Johansen cointegration test for ASEAN5 total trade .106 Table - 12 Johansen cointegration test for ASEAN5 imports 106 Table - 13 Johansen cointegration test for ASEAN5 exports 107 Table - 14 VECMs and VAR for each of ASEAN5 imports and exports .109 Table - 15 VECM: Error correction term for total trade 115 Table - 16 VECM: Error correction term for ASEAN5 exports .116 viii Table - 17 Temporal causality for total trade 118 Table - 18 Temporal causality for ASEAN5 imports 120 Table - 19 Temporal causality for ASEAN5 exports 122 List of Tables for Chapter Table - Summary statistics for dependent and explanatory returns of the portfolios for Malaysia 127 Table - Summary statistics for dependent and explanatory returns of the portfolios for Singapore 128 Table - Summary statistics for dependent and explanatory returns of the portfolios for Thailand 129 Table - Summary statistics for dependent and explanatory returns of the portfolios for Indonesia 130 Table - Summary statistics for dependent and explanatory returns of the portfolios for the Philippines 131 Table - Correlation for explanatory variables of the regression models 132 Table - Regression analysis of the CAPM for Malaysia 134 Table - Regression analysis of the four-factor model for Malaysia 135 Table - Regression analysis of the CAPM for Singapore 138 Table - 10 Regression analysis of the four-factor model for Singapore 140 Table - 11 Regression analysis of the CAPM for Thailand 142 Table - 12 Regression analysis of the four-factor model for Thailand 143 Table - 13 Regression analysis of the CAPM for Indonesia 144 Table - 14 Regression analysis of the four-factor model for the stock market of Indonesia 146 Table - 15 Regression analysis of the CAPM for the Philippines 147 Table - 16 Regression analysis of the four-factor model for the Philippines 149 Table - 17 SURE model based tests for coefficient restrictions on four-factor model 151 List of Tables for Chapter Table - Correlations among explanatory variables for Malaysia 156 Table - Correlations among explanatory variables for Singapore 156 Table - Correlations among explanatory variables for Thailand 157 Table - Correlations among explanatory variables for Indonesia 157 Table - Correlations among explanatory variables for the Philippines 158 Table - Regressions of the four-factor model with macro variables for Malaysia 160 Table - Regressions of the four-factor model with macro variables for Singapore 162 Table - Regressions of the four-factor model with macro variables for Thailand 164 Table - Regressions of the four-factor model with macro variables for Indonesia 166 Table - 10 Regressions of the four-factor model with macro variables for the Philippines 168 Table - 11 Regressions of the four-factor model with single macro factor for Malaysia 171 Table - 12 Regressions of the four-factor model with single macro factor for Singapore 172 Table - 13 Regressions of the four-factor model with single macro factor for Thailand174 Table - 14 Regressions of the four-factor model with single macro factor for Indonesia 176 ix Table - 15 Regressions of the four-factor model with single macro factor for the Philippines 178 Table - 16 SURE model based tests for coefficient restrictions for macro-factor model 180 x Chapter 10 CONCLUSION 10.1 Introduction This thesis focuses on five of the ASEAN countries that include Malaysia, Singapore, Thailand, Indonesia and the Philippines, known as the ASEAN5 There are five analysis chapters included in this thesis, three of which (Chapter 5, and 7) examine the linkages that exist between the equity markets, GDP and trade within the ASEAN5 These are followed by two chapters that test asset pricing models for the ASEAN5 equity markets Analysis in Chapter is based on a four-factor model while Chapter adds four macro factors to the basic four-factor model tested in Chapter The data analysed for each of these chapters spans the period from January 1990 to March 2006 (approximately 16 years of data) Chapter examines the short-run and long-run linkages that exist between the ASEAN5 equity markets as well as links with the developed equity markets of the US, Japan and Australia The Full period, pre-crisis and post-crisis sub-periods are included in analysis to identify possible changes in the links existing over the period of the analysis Key findings from this chapter suggest that the equity markets of ASEAN5 are highly correlated, with cointegration analysis showing that these equity markets also share a longterm equilibrium relationship The finding is robust to the inclusion of the US, Japanese or Australian equity markets in the analysis Moreover, the linkages between the ASEAN5 equity markets vary over the different sub-periods with tighter links recorded in the postcrisis period The US equity market is generally more influential than either the Japanese or Australian equity markets Cointegration tests for GDP links examined in Chapter suggest that real and nominal GDP growth of the ASEAN5 is cointegrated over the full period and the postcrisis period, supporting the notion that economic links among the ASEAN5 increased after the 1997 crisis It is important to note that a longer crisis period (six quarters) is needed for analysis used in this GDP chapter than for the equity markets chapter (four quarters), which is consistent with the ‘stickiness’ of macroeconomic variables The economic growth of the ASEAN5 countries has been driven by trade Analysis of the ASEAN5 trade in Chapter provides a deeper understanding of different patterns of 183 trade linkages that prevail within these economies Initially, the analyses point to several important aspects of ASEAN5 trade It is found that the value of intra-ASEAN5 imports is less than the value of intra-ASEAN exports, the ASEAN5 countries trade more with nonASEAN countries, and the 1997 crisis resulted in increased levels of ASEAN5 export competitiveness, apparently supported by currency devaluation for most of the ASEAN5 countries Cointegration tests highlight the variation that exists in long-term relationships for various ASEAN5 trade measures First, there is limited evidence of cointegration between imports and exports for the ASEAN5 countries, suggesting that country imports and exports are not tightly linked within the ASEAN5 economies Second, ASEAN5 total trade exhibits tighter links after the crisis − most probably driven by exports Third, ASEAN5 exports are cointegrated in the full period analysis but this is mostly driven by strong export links existing before the 1997 crisis Lastly, there is no evidence to support the existence of cointegrating relationships for ASEAN5 imports in any of the study periods, indicating that other factors may be more important in determining ASEAN5 imports The traditional CAPM and the four-factor asset pricing models (market, size, value and momentum effects) are used in Chapter to analyse the variation in size-BTME and industry portfolio returns; the results of these analyses support the greater explanatory power of the four-factor model relative to the CAPM for all of the ASEAN5 countries In general, size and value effects are more prominent than the momentum effects in explaining the variation in portfolio returns In most cases, small size and high-value stocks generate higher returns than big size and low-value stocks, consistent with previous studies Analysis in Chapter extends the four-factor model asset pricing with four additional macro factors The macro factors employed to examine the variation in sizeBTME and industry returns for the ASEAN5 include local macro factors represented by unexpected GDP (UGDP), unexpected total trade (UTT) and unexpected equity market returns (PRI), while a global macro factor is represented by the world excess market returns (WRF) The local macro factors are derived from VECMs or VARs developed for ASEAN5 GDP, trade and equity markets This analysis indicates that the explanatory power of macro factor variables varies across the ASEAN5 In most cases, the macro factors tend to provide higher explanatory power when a single factor is added to the basic four-factor model, and this is expected 184 given some multicollinearity that exists among the macro variables The world excess returns exhibits limited impact on asset pricing for ASEAN5 portfolio returns In addition, the size-BTME portfolios generally exhibit greater sensitivity to macro variables than the industry portfolios While the marginal effects of the macro factor analysis are nonsubstantial compared to the four-factor analysis, they are important nonetheless in explaining the ASEAN5 equity markets returns In summary, the overall findings from this thesis give rise to several important conclusions The equity markets within the ASEAN5 are closely related GDP growth within the ASEAN5 economies is also closely related Further, long-term trade links differ somewhat based on chosen trade measures These findings have important implications for ASEAN as a whole ASEAN5 asset pricing is yet to receive much attention in the mainstream literature and this thesis provides further insight into ASEAN5 asset pricing 10.2 Limitations of study Care should be taken in generalisation of the results of GDP analysis to other macroeconomic variables The limited sample period of the pre-crisis and post-crisis periods may affect the generalisation of the sub-period findings for the cointegration tests reported in this thesis Furthermore, cointegration analysis is useful for distinguishing whether a long-run relationship exists during the period but it cannot test for a gradual movement towards integration Chapter uses the US equity market returns as a proxy for world effects and this may impose some limits on the interpretation and generalisation of results, given the emergence of the economic power of China and India during the study period The data used for the formation of size-BTME portfolios are based on availability from Datastream As such, some caveat applies to the generalisation of results due to data limitations This was one of the reasons for analysing industry portfolios as well as the size-BTME portfolios The macro factors employed in Chapter are limited to unexpected GDP, unexpected total trade, unexpected market returns and world excess returns (as a proxy of world effects) Therefore, some caveats should be kept in mind when interpreting these results because of the limited range of macro factors included in this chapter 185 10.3 Suggestions for further studies First, the period of study used throughout this thesis is from January 1990 to March 2006 and the data is mostly obtained from Datastream A longer study period with different sources of data could be an important extension to test the robustness of the results found in this thesis Second, instead of using the US equity market returns as a proxy for the world effect, it would be interesting to examine the changes in cointegration results for the equity markets within the ASEAN5 when the proxy for world effect uses a broader index with adequate coverage of the Chinese and Indian stock markets Third, there is an extensive literature dealing with size and value effects in the asset pricing literature, but this is not the case for 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This thesis contributes to our understanding of the ASEAN group, focusing on the ASEAN5 with particular attention paid to asset pricing and the linkages between equity markets, GDP and trade. .. between GDP within the ASEAN5 economies contribute to our understanding of the ASEAN5 economic links In this thesis, time series analysis of GDP (both in real and nominal US dollar GDP) along with