Equity market price interdependence based on bootstrap causality tests: evidence from Australia and its major trading partners

Abstract

We re-examine the issue of equity market price interdependence between Australia, on one hand and Japan, US, UK, Hong Kong, Singapore, Taiwan and Korea, on the other hand, based on Hacker and Hatemi-J (2005) bootstrap Granger-causality tests with leveraged adjustments. We take into account the Asian Crisis and find that no causal linkages existed between Australia and these markets before and after the Crisis. These results imply that the transmission of information between the equity market of Australia and those of its trading partners is efficient. Given that the correlation between Australia and these markets are relatively low, these results give further confirmation that the latter group of markets can serve as good avenues for portfolio diversification by Australian investors.

Notes

¹ While there has been disagreement as to the exact period of occurrence of the Asian crisis, Roger (2001) argued that by 1 January 1988, countries affected heavily by the Asian crisis have started to show signs of significant recovery. We, therefore, use the period 2 July 1997 to 31 December 1997 as the break for the Asian crisis.

² The results of these diagnostic tests are not presented here to save space but they are available on request.

³ It is shown by Hatemi-J (2004) that the LM test has better size properties compared to alternative tests for autocorrelation, especially for nonstationary cases.

⁴ The bootstrap technique was originally introduced by Efron (1979).

⁵ For more details on leverage adjustment, see Davison and Hinkley (1999) and Hacker and Hatemi-J (2005). The latter authors introduce this adjustment for multivariate equation cases.

⁶ The results are not sensitive to the number of simulations in our case.

⁷ A program procedure written in GAUSS to conduct leveraged bootstrap simulations is available on request from the authors.