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Dynamic linkages and the propagation mechanism driving major international stock markets: an analysis of the pre- and post-crash eras
No full textThe stock market crash of October 1987 earmarked fears of a deep-seated financial crisis. In recent years, while there has been a number of empirical studies devoted to examinations of the number of common trends in a system of stock price indexes, only a minority has focused on what effect the crash has had on the characteristics [namely, the amount of co-movements amongst markets, their dynamic linkages, and implications for the transmission or propagation mechanism] of major stock markets. In this paper, we demonstrate how the techniques of unit root testing, cointegration, vector error-correction modelling (VECM) and forecast error variance decomposition (VDC) analysis, may be used to shed some light on these concerns in the context of six major international stock markets. Using two non-overlapping samples, we find evidence of a single cointegrating vector (or five common trends) over each of the pre- and post crash samples. A VECM is then constructed in which the temporal causal dynamics are examined, followed by decomposing the total impact of an unanticipated shock to each of the variables beyond the sample period, into proportions attributable to shocks in the other variables including its own. Results tend to broadly indicate: (1) the crash does not appear to have affected the relative leading role played by the US market over other markets; (2) the German and, British markets seem to have become more dependent on other markets over the post-crash era relative to the pre-crash; and (3) provide confirming evidence that, in general, the crash has brought about a greater interaction amongst markets, with a greater role for fluctuations in explaining shocks across markets (including that for the U.S
Stock-Watson dynamic OLS (DOLS) and error-correction modelling approaches to estimating long- and short-run elasticities in a demand function: new evidence and methodological implications from an application to the demand for coal in mainland China
No full textIn this paper robust elasticity estimates of coal demand for China are derived using annual data 1953-92. In so doing, we illustrate the use of a powerful yet practically convenient and recently developed modelling procedure devised by Stock and Watson (known as Dynamic OLS (DOLS)), who provide evidence, based on Monte Carlo simulations, of this estimator being superior in small samples compared to a number of alternative estimators, as well as being able not only to accommodate higher orders of integration but also to account for possible simultaneity within regressors of a potential demand system. Furthermore, cointegration and error-correction methods are employed to derive short-run price and income elasticities. Estimated results are quite robust not only in terms of statistical prowess but also in terms of economic intuition and indicate that, over the long run, both price and income elasticities are close to unity. While short-run price and income elasticities are less (in absolute value) than their long-run counterparts, there seems to be some divergence in short-run parameters from a subsample analysis. Overall, results seem to imply that for China, coal consumption should remain relatively constant as future modernization strategies for economic development are pursued. In addition, the study has clear methodological implications for estimating the long- and short-run elasticities in a demand function in general, and in a wide variety of fields in future applied research
Empirical tests to discern the dynamic causal chain in macroeconomic activity: new evidence from Thailand and Malaysia based on a multivariate cointegration/vector error-correction modeling approach
No full textThe primary aim of this paper is to make an initial attempt to conduct empirical tests in order to discern the dynamic causal chain-in the Granger (temporal) sense rather than
in the structural sense-among real output, money, interest rate, inflation, and the exchange rate in the context of two small Southeast Asian developing economies, such as Thailand and Malaysia. The methodology employed uses various unit root tests and Johansen's cointegration test followed by vector error-correction modeling, variance decompositions, and impulse response functions in order to capture both the within-sample and out-of-sample Granger-causal chain among macroeconomic activity. Given the relatively stable macroeconomic environment in these two growth-oriented economies, the results, quite in line with our expectations, tend to suggest that in the Granger-causality sense, money supply (particularly MI) appears to have played the leading role of a policy variable being the most exogenous of all, and the other variables including output, rate of interest, exchange rate, and prices appear to have borne most of the brunt of short-run adjustment endogenously in different proportions in order to re-establish the long-run equilibrium
Macroeconomic activity dynamics and Granger causality: new evidence from a small developing economy based on a vector error-correction modelling analysis
No full textThe main purpose of this paper is to discern the dynamic causal chain (in the Granger (temporal) sense rather than in the structural sense) among real output, money, interest rate, inflation and the exchange rate in the context of a small Asian developing economy, such as Indonesia. The methodology employed uses various unit root tests and Johansen's cointegration test followed by vector error-correction modelling, variance decompositions, and impulse response functions in order to capture both the within-sample and out-of-sample Granger causal chain among macroeconomic activity. Given the inward-oriented growth strategy of this small developing economy, where the real output was vulnerable to vicissitudes of the agricultural sector and exports (particularly oil), our results are quite in line with our expectations, and tend to suggest that in the Granger-causality sense, output was relatively the leading variable being the most exogenous of all, and all other variables including money supply, rate of interest, exchange rate, and prices had to bear the brunt of adjustment endogenously in different proportions in order to accommodate that real shock. The Granger-causal chain implied by our evidence that real output more often predominantly leads (rather than lags) money supply and the other three endogenous variables, is consistent more with the recent real business cycle (RBC) theory than with the other two major macroeconomic paradigms such as the Keynesian and the monetarist. This finding has clear policy implications for any accommodative and/or excessive monetary expansion since it is likely to be dissipated in terms of relatively higher nominal variables, such as prices, exchange rates or interest rates rather than real output, for a small developing economy like Indonesia in the context of a relatively unstable macroeconomic environment
Energy consumption, real income and temporal causality: results from a multi-country study based on cointegration and error-correction modelling techniques
No full textUnlike previous studies on the causal relationship between energy consumption and economic growth, this paper illustrates how the finding of cointegration (i.e. long-term
equilibrium relationship) between these variables, may be used in testing Granger causality. Based on the most recent Johansen's multivariate cointegration tests preceded by various unit root or non-stationarity tests, we test for cointegration between total energy consumption and real income of six Asian economies: India, Pakistan, Malaysia, Singapore, Indonesia and the Philippines. Non-rejection of cointegration between variables rules out Granger non-causality and imples at least one way of Granger-causality, either unidirectional or bidirectionial. Secondly, by using a dynamic vector error-correction model, we then analyse the direction of Granger-causation and hence the within-sample Granger-exogeneity or endogeneity of each of the variables
Common stochastic trends, multivariate market efficiency and the temporal causal dynamics in a system of daily spot exchange rates
No full textIt is demonstrated how the techniques of unit root testing and cointegration may be used to test for common stochastic trends, and their implications for addressing the
market efficiency hypothesis (MEH) in a multivariate context within a seven-variable system of major daily (unpublished) spot exchange rates of the Malaysian ringgit.
Finding the evidence of two cointegrating vectors, a vector error-correction model is developed to test for the direction of temporal causal dytiamics (iti the Gratiger sense)
within this system before investigating the relative strength of the causality by decomposing the total impact of an unanticipated shock to each of the variables beyond the sample period, into proportions attributable to shocks in the other variables including its own. Results from the analysis tend to suggest a violation of the MEH in a speculative sense, due to the presence of two cointegrating vectors which also withstood the temporal instability test
Temporal causality and the dynamics of different categories of crime and their socioeconomic determinants: evidence from Australia
No full textHale and Sabbagh (1991) failed to find cointegration (i.e. a long-term equilibrium relationship) between crime and unemployment in the case of England and Wales. The present study (based on multiple cointegration tests preceded by various unit root or non-stationarity tests) is the first attempt at putting the analysis of crime in a temporal Granger-causal framework in the Australian case (1963-90) by binding the relationship between different categories of crime and their socioeconomic determinants within a multivariate cointegrated system. The results, based on the most recent methodology, broadly indicate that, although the relative importance of the determinants of crime varied by type of crime, of all the determinants it is `dwelling commencements' (a proxy for `wealth') that appears to impact more or less on all the categories of crime significantly, followed by `urbanization'
Determinants of foreign banking activity in Malaysia
No full textThis paper studies the factors which determine the level of activity of foreign banks in the Malaysian economy, in the contect of the policy framework laid down by the central bank of the country. The authors conclude that, with trade financing as the the main activity of foreign banks, they did not benefit much from the growth of the economy per se. What has actually happened is that the business growth of domestic banks has been at the expense of foreign banks
Economic principles in Islam: some methodological issues
No full textThis paper examines the nature of economic principles in Islam. Two types of economic principles are identified. The first type refers to the economic laws derived from revelation-based sources namely the Quran, Sunnah, Ijtihad and Ijma. The second type refers to economic lwas derived from reasoning and experience. The former is the economic system and the latter is economic theory. Both forms of economic laws are in harmony and have no basis for compartmentalization as there is no conflict between revelation and science in Islam. in theory building, it is shown that Quran based assumptions act as the linking mechanism in harmonizing revelation and science. As revelation is superior to reason and experience. Modification of economic models for empirical verification must not involve changes in Quranic based assumptions. Only the observed or tabi' based assumptions are subjec to modifications
Temporal causality and dynamic interactions among macroeconomic activity within a multivariate cointegrated system: evidence from Singapore and Korea
No full textThe main purpose of this paper is to discern the dynamic causal relationship (in the Granger (temporal) sense) among real output, money, interest rate, inflation and exchange rate in the context of two small open economies, such as Singapore and Korea. The Granger-causal chain implied by the authors' evidence that real output more often the authors' predominantly leads (rather than lags) money supply followed by other three endogenous variables, is consistent more with the recent Real Business Cycle theory than with the other two major macroeconomic paradigms such as the Keynesian and the Monetarist