The New Zealand market's relationship with Australia and Pacific-Basin share markets: is New Zealand converging with Australia?

Abstract

Using 33 years of data this article considers linkages between New Zealand, Australia and various other Pacific-Basin equity markets. Using time-varying parameter modelling techniques we show that the New Zealand stock market returns have become increasingly sensitive to perturbations in the Australian market relative to those in other Pacific-Basin markets. This has implications for a stock market merger between these two countries as well as a possible monetary union.

Notes

¹ India for example, has embarked on a series of regulatory reforms in recent years.

² It was an upscaling of the 1965 New Zealand Australia Free Trade Agreement (NAFTA).

³ MERT Information Bulletin no. 33, December 1990 and Statistics New Zealand HOTP Overseas Merchandise Trade tables, http://www.stats.govt.nz/. New Zealand has also been involved in the promotion of several multilateral organisations, notably APECⁱⁱⁱ, GATT (of which New Zealand is a founding member) and its successor, the WTO.

⁴ New Zealand is also considering further free trade agreements with existing groupings, such as AFTA^iv and NAFTA and directly with several individual countries, for example, the US and Mexico. An agreement with Chile has been concluded forming a CER triangle consisting of New Zealand, Chile and Singapore. It is also worth noting that the recently signed free trade agreement between Australia and the US (January 2004) will have a substantial impact on the trade relationship between New Zealand and Australia, irrespective of whether New Zealand also secures such an agreement.

⁵ For example, Hutching, National Business Review, 19th January 2001. Springall,The Independent, 9 October 2002. Wilmott, Australian Financial Review, 24th September 2002.

⁶ Wall Street Journal 18 September 2000, p A.38. New Zealand Herald 27 April 2000 p C1.

⁷ Essentially identical convergence was obtained by using the Frank Russell Limited index alone.

⁸ The Hong Kong Treasury Bill series is only available from December 1993 and therefore the longer dated best lending rate series was used. (The two series are highly correlated.)

⁹ The Japanese Private Bill rate is only available from October 1980. It was observed that the best lending rate was more closely correlated with the Private Bill rate for the common time period than the 10-year Government Bond rate and that the best lending rate was therefore used.

¹⁰ The Interbank Offer rate was the longest running relevant Singaporean interest rate, however, it only begins in August 1973 and consequently the results involving Singaporean excess returns are truncated at this date.

¹¹ When considering real returns (not reported), where possible, monthly CPI figures are obtained for each country to approximate inflation, except for Australia and New Zealand where only quarterly inflation figures are produced. Straight-line interpolation is employed in these instances to obtain an estimate for the intermediary months.