Is the Liberalization Policy Effective on Improving the Bivariate Cointegration of Current Accounts, Foreign Exchange, Stock Prices? Further Evidence from Asian Markets
This paper fist examines three set of bivariate cointegrations between any two of current accounts, stock markets, and currency exchange markets in ten Asian countries. Furthermore, we examined the effect of country characters on this bivariate cointegration. Our findings suggest that for three sets of cointegration test, each sample country at least exists one cointegration. India consistently exhibited a bi-directional causal relationship between any two of three indicators. Unlike Pan et al. (2007) and Phylaktis and Ravazzolo (2005), we found that such cointegration is influenced by three characteristics: capital control; flexibility in foreign exchange rates; and the ratio of trade to GDP. These characteristics are the result of liberalization in each Asian country. This implies that liberalization policies are effective on improving the cointegration between any two of financial markets and current account for ten Asian countries.
[1] Phylaktis, K., Ravazzolo, F. (2005). Stock prices and exchange rate
dynamics. Journal of International Money and Finance 24, 1031-1053.
[2] Pan, M., Fok, R.C., Liu, Y.A., 2007. Dynamic linkages between
exchange rates and stock prices: evidence from East Asian markets.
International Review of Economics and Finance 16, 503-520.
[3] Tai, C.S., 2007. Market integration and contagion: Evidence from Asian
emerging stock and foreign exchange markets. Emerging Markets Review
8, 264-283.
[4] Lee, K.S.,Yoon, S., 2007. Interrelationships and volatility of the financial
asset prices under capital flows: The case of Korea. Economic Modelling
24, 386-397.
[5] Baharumshah, A.Z., A. M. Masih, 2005. Current account, exchange rate
dynamics and the predictability: the experience of Malaysia and
Singapore. Journal of International Financial Markets, Institutions &
Money 15, 255-270.
[6] Miller, N.C., 2005. Can exchange rate variations or trade policy alter the
equilibrium current account? Journal of International Money and
Finance 24, 465-480.
[7] Freund C., 2005. Current account adjustment in industrial countries.
Journal of International Money and Finance 24, 1278-1298.
[8] Bergin, P.R., Sheffrin, S.M., 2006. How well can the New Open
Economy Macroeconomics explain the exchange rate and current account?
Journal of International Money and Finance 25, 675-701.
[9] Devereux, M.B., Genberg, H., 2007. Currency appreciation and current
account adjustment. Journal of International Money and Finance 26,
570-586.
[10] Fratzscher, M., Juvenal L., Sarno, L., 2010. Asset prices, exchange rates
and the current account. European Economic Review 54, 643´╝ì658.
[11] Caballero,R., Farhi,E., Gourinchas, P.-O., 2006a. An equilibrium model
of global imbalance and low interest rates, MIT and University of
California, Berkeley, mimeo.
[12] Caballero,R., Farhi,E., Hammour, M., 2006b. Speculative growth: hints
from the US economy. American Economic Review 96, 1159-1192.
[13] Kitamura, Y., 2009. The current account and stock return. Research in
International Business and Finance 23, 302-321.
[14] Dornbusch, R., Fischer, S., 1980. Exchange rates and current account.
American Economic Review 70, 960´╝ì971.
[15] Branson, W.H. (1983). Macroeconomic determinants of real exchange
rate risk. In: Herring, R.J. (Ed.), Managing Foreign Exchange Rate Risk.
Cambridge University Press, Cambridge, MA.
[16] Frankel, J.A. (1983). Monetary and portfolio balance models of
exchange rate determination. In: Bhandari, J.S., Putnam, B.H. (Eds.),
Economic Interdependence and Flexible Exchange Rates. MIT Press,
Cambridge, MA.
[17] Wu, Y., 2000. Stock prices and exchange rates in a VEC modelÔÇöThe
case of Singapore in the 1990s. Journal of Economics and Finance 24,
260−274.
[18] Ramasamy, B., Yeung, M., 2002. The relationship between exchange
rates and stock price: implications for capital controls. Asia Pacific
Journal of Economic Business 6 (2), 46-60.
[19]Chiang, T.C., Yang, S.Y., 2003. Foreign exchange risk premiums and
time-varying equity market risks. International Journal of Risk
Assessment Management 4 (4), 310-331.
[20] Yau, H.Y., Nieh, C.C., 2009. Testing for cointegration with threshold
effect between stock prices and exchange rates in Japan and Taiwan.
Japan and the World Economy 21, 292-300.
[21] Zhao, H., 2010. Dynamic relationship between exchange rate and stock
price: Evidence from China. Research in International Business and
Finance 24, 103-112.
[22] Bergin, P.R., Sheffrin, S.M., 2000. Interest rates, exchange rates and
present value models of the current account. The Economic Journal 110
(April), 535-558.
[23] Iscan, T.B., 2003. Present value test of the current account with durable
consumption. Journal of International Money and Finance 21 (3),
1495-1507.
[24] Gruber, J.W., 2004. A present value test of habits and the current
account. Journal of Monetary Economics 51 (7), 1495-1507.
[25] Husted, S., MacDonald, R. (1999). The Asian currency crash: were
badly driven fundamentals to blame? Journal of Asian Economics 10,
537-550.
[26] Chinn, M.D. (2000). Before the fall: were East Asian currencies
overvalued? Emerging Market Review 1, 101-126.
[27] Mercereau, B., 2003a. The role of stock markets in current account
dynamics: a time series approach. Topics in Macroeconomics 3 (1).
[28] Mercereau, B., 2003b. The role of stock markets in current account
dynamics: Evidence from the United States. IMF Working Papers
03/108.
[29] Kraay, A., Ventura, J., 2005. The dot-com bubble the bush deficits and
the U.S. current account. NBER Working Paper. No.11543.
[30] Hall, R.E., 1978. Stochastic implication of the life cycle-permanent
income hypothesis: theory and evidence. Journal of Politic Economics
86 (6), 971-987.
[31] Romer, C., 1990. The Great Crash and the onset of the Great Depression.
Quarterly Journal of Economics 105, 597-624.
[32] Poterba, J.M., Samwick, A.A., 1995. Stock ownership patterns, stock
market fluctuations, and consumption. Brookings Paper Economics
Activity 2, 295-372.
[33] MacDonald, R., Taylor, M.P., 1993. The monetary approach to the
exchange rate: rational expectations, long-run equilibrium, and
forecasting. International Monetary Fund Staff Papers 40, 89-107.
[34] MacDonald, R., Taylor, M.P., 1994a. The monetary model of the
exchange rate: long-run relationships, short-run dynamics, and how to
beat a random walk. Journal of International Money and Finance 13,
276-290.
[35] MacDonald, R., Taylor, M.P., 1994b. Re-examining the monetary
approach to the exchange rate: the dollar-France, 1976-1990. Applied
Financial Economics 4, 423-429.
[36] Copeland, Laurence, (2005). Exchange Rates and International Finance,
4th edition, Harlow: Pearson Education Limited Edinburgh.
[37] Johansen, S., 1988. Statistical analysis of cointegration vectors. Journal
of Economic Dynamics and Control 12, 231-254.
[38] Johansen, S., Juselius, K., 1990. Maximumlikelihood estimation and
inference on cointegration with applications to the demand for money.
Oxford Bulletin of Economics and Statistics 52, 169-210.
[1] Phylaktis, K., Ravazzolo, F. (2005). Stock prices and exchange rate
dynamics. Journal of International Money and Finance 24, 1031-1053.
[2] Pan, M., Fok, R.C., Liu, Y.A., 2007. Dynamic linkages between
exchange rates and stock prices: evidence from East Asian markets.
International Review of Economics and Finance 16, 503-520.
[3] Tai, C.S., 2007. Market integration and contagion: Evidence from Asian
emerging stock and foreign exchange markets. Emerging Markets Review
8, 264-283.
[4] Lee, K.S.,Yoon, S., 2007. Interrelationships and volatility of the financial
asset prices under capital flows: The case of Korea. Economic Modelling
24, 386-397.
[5] Baharumshah, A.Z., A. M. Masih, 2005. Current account, exchange rate
dynamics and the predictability: the experience of Malaysia and
Singapore. Journal of International Financial Markets, Institutions &
Money 15, 255-270.
[6] Miller, N.C., 2005. Can exchange rate variations or trade policy alter the
equilibrium current account? Journal of International Money and
Finance 24, 465-480.
[7] Freund C., 2005. Current account adjustment in industrial countries.
Journal of International Money and Finance 24, 1278-1298.
[8] Bergin, P.R., Sheffrin, S.M., 2006. How well can the New Open
Economy Macroeconomics explain the exchange rate and current account?
Journal of International Money and Finance 25, 675-701.
[9] Devereux, M.B., Genberg, H., 2007. Currency appreciation and current
account adjustment. Journal of International Money and Finance 26,
570-586.
[10] Fratzscher, M., Juvenal L., Sarno, L., 2010. Asset prices, exchange rates
and the current account. European Economic Review 54, 643´╝ì658.
[11] Caballero,R., Farhi,E., Gourinchas, P.-O., 2006a. An equilibrium model
of global imbalance and low interest rates, MIT and University of
California, Berkeley, mimeo.
[12] Caballero,R., Farhi,E., Hammour, M., 2006b. Speculative growth: hints
from the US economy. American Economic Review 96, 1159-1192.
[13] Kitamura, Y., 2009. The current account and stock return. Research in
International Business and Finance 23, 302-321.
[14] Dornbusch, R., Fischer, S., 1980. Exchange rates and current account.
American Economic Review 70, 960´╝ì971.
[15] Branson, W.H. (1983). Macroeconomic determinants of real exchange
rate risk. In: Herring, R.J. (Ed.), Managing Foreign Exchange Rate Risk.
Cambridge University Press, Cambridge, MA.
[16] Frankel, J.A. (1983). Monetary and portfolio balance models of
exchange rate determination. In: Bhandari, J.S., Putnam, B.H. (Eds.),
Economic Interdependence and Flexible Exchange Rates. MIT Press,
Cambridge, MA.
[17] Wu, Y., 2000. Stock prices and exchange rates in a VEC modelÔÇöThe
case of Singapore in the 1990s. Journal of Economics and Finance 24,
260−274.
[18] Ramasamy, B., Yeung, M., 2002. The relationship between exchange
rates and stock price: implications for capital controls. Asia Pacific
Journal of Economic Business 6 (2), 46-60.
[19]Chiang, T.C., Yang, S.Y., 2003. Foreign exchange risk premiums and
time-varying equity market risks. International Journal of Risk
Assessment Management 4 (4), 310-331.
[20] Yau, H.Y., Nieh, C.C., 2009. Testing for cointegration with threshold
effect between stock prices and exchange rates in Japan and Taiwan.
Japan and the World Economy 21, 292-300.
[21] Zhao, H., 2010. Dynamic relationship between exchange rate and stock
price: Evidence from China. Research in International Business and
Finance 24, 103-112.
[22] Bergin, P.R., Sheffrin, S.M., 2000. Interest rates, exchange rates and
present value models of the current account. The Economic Journal 110
(April), 535-558.
[23] Iscan, T.B., 2003. Present value test of the current account with durable
consumption. Journal of International Money and Finance 21 (3),
1495-1507.
[24] Gruber, J.W., 2004. A present value test of habits and the current
account. Journal of Monetary Economics 51 (7), 1495-1507.
[25] Husted, S., MacDonald, R. (1999). The Asian currency crash: were
badly driven fundamentals to blame? Journal of Asian Economics 10,
537-550.
[26] Chinn, M.D. (2000). Before the fall: were East Asian currencies
overvalued? Emerging Market Review 1, 101-126.
[27] Mercereau, B., 2003a. The role of stock markets in current account
dynamics: a time series approach. Topics in Macroeconomics 3 (1).
[28] Mercereau, B., 2003b. The role of stock markets in current account
dynamics: Evidence from the United States. IMF Working Papers
03/108.
[29] Kraay, A., Ventura, J., 2005. The dot-com bubble the bush deficits and
the U.S. current account. NBER Working Paper. No.11543.
[30] Hall, R.E., 1978. Stochastic implication of the life cycle-permanent
income hypothesis: theory and evidence. Journal of Politic Economics
86 (6), 971-987.
[31] Romer, C., 1990. The Great Crash and the onset of the Great Depression.
Quarterly Journal of Economics 105, 597-624.
[32] Poterba, J.M., Samwick, A.A., 1995. Stock ownership patterns, stock
market fluctuations, and consumption. Brookings Paper Economics
Activity 2, 295-372.
[33] MacDonald, R., Taylor, M.P., 1993. The monetary approach to the
exchange rate: rational expectations, long-run equilibrium, and
forecasting. International Monetary Fund Staff Papers 40, 89-107.
[34] MacDonald, R., Taylor, M.P., 1994a. The monetary model of the
exchange rate: long-run relationships, short-run dynamics, and how to
beat a random walk. Journal of International Money and Finance 13,
276-290.
[35] MacDonald, R., Taylor, M.P., 1994b. Re-examining the monetary
approach to the exchange rate: the dollar-France, 1976-1990. Applied
Financial Economics 4, 423-429.
[36] Copeland, Laurence, (2005). Exchange Rates and International Finance,
4th edition, Harlow: Pearson Education Limited Edinburgh.
[37] Johansen, S., 1988. Statistical analysis of cointegration vectors. Journal
of Economic Dynamics and Control 12, 231-254.
[38] Johansen, S., Juselius, K., 1990. Maximumlikelihood estimation and
inference on cointegration with applications to the demand for money.
Oxford Bulletin of Economics and Statistics 52, 169-210.
@article{"International Journal of Business, Human and Social Sciences:57522", author = "Chen-Yin Kuo", title = "Is the Liberalization Policy Effective on Improving the Bivariate Cointegration of Current Accounts, Foreign Exchange, Stock Prices? Further Evidence from Asian Markets", abstract = "This paper fist examines three set of bivariate cointegrations between any two of current accounts, stock markets, and currency exchange markets in ten Asian countries. Furthermore, we examined the effect of country characters on this bivariate cointegration. Our findings suggest that for three sets of cointegration test, each sample country at least exists one cointegration. India consistently exhibited a bi-directional causal relationship between any two of three indicators. Unlike Pan et al. (2007) and Phylaktis and Ravazzolo (2005), we found that such cointegration is influenced by three characteristics: capital control; flexibility in foreign exchange rates; and the ratio of trade to GDP. These characteristics are the result of liberalization in each Asian country. This implies that liberalization policies are effective on improving the cointegration between any two of financial markets and current account for ten Asian countries.
", keywords = "Current account, stock price, foreign exchange rate, country characteristics, bivariate cointegration, bi-directional causal relationships.", volume = "5", number = "3", pages = "303-11", }
