Who has more influence on Asian stock markets around the subprime mortgage crisis – the US or China?

Abstract

This article employed the Momentum Threshold Autoregressive (M-TAR) model to investigate the changes in the asymmetric co-integration relationship between the US and China's stock markets and Asian stock markets of Taiwan, Hong Kong, Singapore, Japan, Korea and India around the subprime mortgage crisis. The main empirical findings demonstrated that with the application of traditional symmetric co-integration tests, the subprime mortgage crisis did not reinforce the co-movement trends between the US and China's markets and Asian markets. However, with the application of the M-TAR model for the threshold co-integration test, there was significant increase in these asymmetric co-integration relationships between them during the period of the subprime mortgage crisis, and our empirical results show evidence that the linkage between the US and China's stock markets is low, and investors can somewhat diversify risks by investing in the United States and China simultaneously.

Keywords:

• M-TAR model
• asymmetric co-integration
• stock markets
• subprime mortgage crisis

JEL Classification:

• C32
• G11
• G15

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Corrigendum

Notes

¹Enders and Granger (1998) pointed out the M-TAR model was especially valuable when adjustment was asymmetric such that the series exhibited more ‘momentum’ in one direction than the other.

²There are restricted fluctuation ranges, 7% for Taiwan and 10% for China, respectively, in the Taiwanese and Chinese stock markets, but there are no such restrictions in the US and Hong Kong stock markets. A reviewer in the sixth China Financial Association Anniversary Conference (CFAAC) questioned whether the restrictions would affect researchers' evaluation results. In our study, there were only 23 days on which the Taiwan Stock Exchange Corporation (TSEC) Weighted Index exceeded the 7% limit and 17 days on which the SSE Composite Index exceeded the 10% limit in our research period, which accounted for less than 3% of the entire samples. Shen and Wang (1998) pointed out that when the samples with restricted ranges were less than 5% of the entire samples, their impact on the evaluation results could be considered insignificant.