Cointegration and Causality between Stock Index and Macroeconomic Variables in an Emerging Market

By Brahmasrene, Tantatape; Jiranyakul, Komain | Academy of Accounting and Financial Studies Journal, September 1, 2007 | Go to article overview
Save to active project

Cointegration and Causality between Stock Index and Macroeconomic Variables in an Emerging Market


Brahmasrene, Tantatape, Jiranyakul, Komain, Academy of Accounting and Financial Studies Journal


ABSTRACT

This study examined the relationship between stock market index and selected macroeconomic variables during the post-financial liberalization (pre-financial crisis) and post-financial crisis in Thailand. In the empirical analysis, unit root, cointegration and Granger causality tests were performed. The post-financial liberalization results showed that the stock market index, the industrial production index, money supply, exchange rate, and world oil prices contained a unit root and were integrated of order one. Johansen cointegration test was then employed. The results showed at least one cointegrating or long-run relation between the stock market index and a set of macroeconomic variables. Money supply had a positive impact on the stock market index while the industrial production index, the exchange rate and oil prices had a negative impact. During the post-financial crisis, all variables were integrated at different orders. Cointegration existed between the stock market index and macroeconomic variables. In addition, the Granger causality test indicated money supply was the only variable positively affecting the stock market returns.

INTRODUCTION

The Stock Exchange of Thailand has been considered an emerging stock market since its inauguration in April 1975. The market capitalization of Thailand Stock Exchange is small while bond trading and other financial innovations have emerged in just the last few years. Like other emerging stock markets in Asia, liberalization in the Thai financial markets, both money and capital markets, reduced the regulation for foreign investors who were interested in investing in Thailand. The financial liberalization in 1992 included lifting capital control measures and allowing banks to lend and borrow more freely in both in- and off-shore transactions. In addition, the Thai government urged capital inflows in both portfolio and foreign direct investment. As a result, the volume of stock trading increased substantially in recent years. Equity instruments are a crucial source of funds for business firms. A continuous increase in private investment via issuing new stocks can be a conduit of GDP expansion and, thus, a high employment rate.

Under the fixed exchange rate regime prior to the financial crisis in 1997, Thailand saw large capital inflows, especially in terms of portfolio investment. This nearly offset the huge current account deficits. Additionally, large capital inflows caused domestic financial institutions to lend a large number of loans to both firms and individual borrowers. The ratio between loans and deposits in the banking system was as high as 1.35 in mid-1990 compared to 0.75 in early 1990. Many analysts believed this was due to the overheating of the Thai economy. In late 1996, private investment accounted for more than 40 percent of the national income. Such phenomena showed that domestic borrowers relied more on foreign capital inflows than domestic savings. During this period, the domestic interest rate rose and caused a wide gap between domestic and foreign interest rates. This interest rate differential induced large capital inflows mostly in portfolio investment. The financial crisis in 1997 had a devastating impact on the Thai economy. A significant effect related to exchange rate risk under the floating exchange rate regime began in July 1 997. Other than real economic activity (e.g., real GDP or the industrial production index) that could affect an investment decision in common stocks, the risk generated from exchange rate fluctuations may also distort the portfolio investment decision. The main objective of this study was to investigate the effects of macroeconomic variables on stock market index/returns in Thailand during the post-financial liberalization prior to the financial crisis (January 1992- June 1997) and after the financial crisis (July 1997-December 2003). The stock market return represents the change in stock market index.

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
Loading One moment ...
Project items
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited article

Cointegration and Causality between Stock Index and Macroeconomic Variables in an Emerging Market
Settings

Settings

Typeface
Text size Smaller Larger
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

While we understand printed pages are helpful to our users, this limitation is necessary to help protect our publishers' copyrighted material and prevent its unlawful distribution. We are sorry for any inconvenience.
Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.

Are you sure you want to delete this highlight?