Short-run Co-movements Research Articles

Cross-stock momentum and factor momentum

Cross-stock momentum builds on the asymmetry in lead-lag linkages and the difference between long-run and short-run contemporaneous co-movements. Data-driven cross-stock linkages generate a monthly alpha of 1.62% (t-stat=10.03). The asymmetry distinguishes cross-stock momentum from factor momentum, and industry momentum is not subsumed by factor momentum. Factor momentum profit is mostly due to the high cross-stock links. The data-driven linkages vary faster over time than those in previous studies because short-run co-movements incorporate persistent linkages.

India as Growth Pole in South Asia

This paper aims at assessing the spill over effects of Indian economic growth on its regional neighbours, the short run and long run co-movements of Indian GDP, food inflation and overall inflation against the corresponding macroeconomic fundamentals of its regional trading partners are explored. The short- and long-run association between the models variables is investigated by employing modern time-series econometric estimators including Impulse Response Functions (IRFs) and Autoregressive Distributed Lag (ARDL) approach to Cointegration. The results reveal that during short run, South Asian (SA) macroeconomic variables respond significantly towards Indian variables in the event of Indian economy receiving positive exogenous shocks. There is relatively weak evidence in favor of Indian growth spill overs when we test the hypothesis country-by-country, through ARDL model. This lack of support is more visible when SA exports are regressed on Indian GDP. However, for two cases of inflation, one obtains reasonable amount of support. On contrary, the long-run association amongst SA exports and Indian GDP established through two Panel cointegration tests, there is strong support in favor of proposed hypothesis, emphasizing the fact that Indian economic growth bears strong spill over effects in short- as well as in long-run towards its regional trading partners.

The importance of principal components in studying mineral prices using vector autoregressive models: Evidence from the Brazilian economy

This study examines the impact of the main Brazilian mineral commodity prices negotiated in trade balance using vector autoregressive models (VAR) in the Brazilian economy in a short-term period. VAR models were applied to the full original data and then to the data dimensionality reduced by principal components denoted by PC-VAR (principal component - vector autoregressive). In the study cases, Cholesky decomposition impulse response and variance decomposition were performed and compared in terms of short run co-movements to identify the most effective model. The applied PC-VAR methodology led to a significant reduction of variables, and similar co-movements were obtained in the short-term period when an impulse response was applied and compared to an unrestricted vector autoregressive. The proposed method also identified the most important variables that affect the other variables in the Brazilian economy and have the same co-movements.

Crude oil and equity market comovements among Asia's for little dragons countries. Evidence of unobserved components approach

Abstract: This paper deals with long-and short-run comovements between crude oil price and selected emerging Asian equity markets qualified, Little dragons countries, by employing the ARDL approach to cointegration of Pesaran et al. (2001) and the unobserved components approach employed by Berger and Pozzi (2013) which deals with the country-specific crude oil effect and common crude oil risk. It is shown in the literature that these techniques enable to obtain reliable results and draw sharp conclusions in several application areas. The short and long run empirical results show evidence of decoupling structure between crude oil price and selected stock markets. The equity markets were heavily fallen at the beginning of the global financial crisis and express less volatility with less magnitude after the GFC crisis. Our findings have important implications for international portfolio diversification.

Detecting Co-Movements in Noncausal Time Series

This paper introduces the notion of common noncausal features and proposes tools to detect them in multivariate time series models. We argue that the existence of co-movements might not be detected using the conventional stationary vector autoregressive (VAR) model as the common dynamics are present in the noncausal (i.e. forward-looking) component of the series. In particular, we show that the presence of a reduced rank structure allows to identify purely causal and noncausal VAR processes of order two and higher even in the Gaussian likelihood framework. Hence, usual test statistics and canonical correlation analysis can still be applied, where both lags and leads are used as instruments to determine whether the common features are present in either the backward- or forward-looking dynamics of the series. The proposed de finitions of co-movements also valid for the mixed causal-noncausal VAR, with the exception that an approximate non-Gaussian maximum likelihood estimator is necessary for these cases. This means however that one loses the bene fits of the simple tools proposed in this paper. An empirical analysis on European Brent and U.S. West Texas Intermediate oil prices illustrates the main fi ndings. Whereas we fail to fi nd any short run co-movements in a conventional causal VAR, they are detected in the growth rates of the series when considering a purely noncausal VAR.

Short-Run and Long-Run Co-Movements in the Income-Consumption Relationship

The study uses the cointegration and common cycle analysis to test whether there are short-run and long-run co-movement relationships between incomes and varies consumption expenditure variables. The analysis aims to detect the long-run co-movements between income and five types of consumption variables, which provides supporting evidence for the common brief that income drives consumption in the long-run. In addition, the analysis also attempts to detect if there are short-run co-movements between income and consumption.

Common Factors, Trends, and Cycles in Large Datasets

This paper considers a non-stationary dynamic factor model for large datasets to disentangle long-run from short-run co-movements. We first propose a new Quasi Maximum Likelihood estimator of the model based on the Kalman Smoother and the Expectation Maximisation algorithm. The asymptotic properties of the estimator are discussed. Then, we show how to separate trends and cycles in the factors by mean of eigenanalysis of the estimated non-stationary factors. Finally, we employ our methodology on a panel of US quarterly macroeconomic indicators to estimate aggregate real output, or Gross Domestic Output, and the output gap.

Contagion Effects on Stock Market of Bangladesh

Due to increased globalization and economic integration in the global economy, contagion effects have been considered an important matter for the investors and policymakers. In the wake of the global financial crisis of September 2008, Islamic financial products were thrust into the spotlight as alternatives to the shaken conventional equity markets. The objective of this study is to discover the Islamic stock market dynamics of Bangladesh with the global Islamic stock markets such as Saudi Arabia, UAE, Kuwait, Europe, UK and Japan. For understanding long run relationship or the theoretical relationships among the Islamic stock market and short run co-movements among Islamic stocks, Johansen co-integration test and Vector Error Correction model (VECM) have been applied respectively. Furthermore, the investigation on short run dynamics is also carried through Impulse Response Function (IRF) analyses. The study found that the Japanese Islamic Stock market is affected to changes in other Islamic stock markets while Kuwait stock market is the leader in the sense it affects other stock market greatly. Bangladeshi Islamic stock market is found to be marginally affecting other stock markets but not as strong as Kuwait. Global Islamic stock market seems to have very little impact to Bangladesh Islamic stock market. The evidence of co-integration and short run dynamics help a diversification benefit may be derived from the cross boarder investment. The empirical evidence of co-integration and short run dynamic relationship found in this study will help investors in making efficient investment decisions and also enhance their understanding of market behavior.

Examining Market Efficiency and Integration of the Islamic Stock Indices

The question of whether the stock market is efficient has been an ongoing debate among researchers. Generally, empirical evidence indicates that most conventional stock indices for developed countries are weak form efficient while inconclusive results are discovered for developing countries. With the growing importance of the Islamic capital markets that run parallel to the conventional stock markets, similar question arises as to whether these new Islamic capital markets are also efficient. Hence this paper aims to examine the weak form efficiency of the Islamic stock indices. Autocorrelation Function (ACF) test and Variance Ratio (VR) test are used to test the market efficiency of the Islamic stock indices from China, India, South Africa, Malaysia, Dubai, Qatar and Japan. The study uses daily data covering the year 2008 until 2012. In addition, this paper attempts to unveil the dynamic causal relationships among the Islamic capital markets. Bivariate Granger Causality test is employed to achieve the objectives. Interestingly only the Islamic stock indices for Malaysia and India are weak form efficient while the results of the Islamic stock indices for Qatar and Kuwait are not. The results of the other Islamic stock indices studied are inconclusive. Johansen multivariate cointegration tests reveal no long-term relationship among the Islamic stock indices. On the other hand, bivariate Granger Causality tests report short run co-movements between Islamic stock indices of Muslim countries and non-Muslim countries, an indication of growing interest of the Islamic financial markets among investors.

Currency Area and Non-Synchronized Business Cycles between the US and Puerto Rico

Frankel and Rose (1997, 1998) state that greater intensity of trading leads to more highly correlated business cycles across countries. Since 2005 Puerto Rico, which belongs to the US currency area, has suffered from economic stagnation. This raises the issue of whether currency areas lead to synchronized business cycles or not. Following Vahid and Engle (1997), we use a test of codependence to examine the short-run co-movements in outputs and prices between the US and Puerto Rico. The outcomes indicate that both economies share a common non-synchronized business cycle. The response from Puerto Rico to temporary US shocks occurs at a lag of one quarter. In addition, Puerto Rican prices respond to temporary shocks to US prices with a lag of two quarters. Furthermore, the forecast error variance decomposition shows that the Puerto Rican economy is highly dependent on the US economy. All evidence suggests that currency areas do not lead to synchronized business cycles. However, even though Puerto Rico has a non-synchronized common cycle with the US, the results appear to be that the current economic struggle in Puerto Rico is a long-term one, instead of a short-term one.

The Relationship of Islamic Investment Rates and Interest Rates Revisited: Turkish Case

Islamic banking has been facing a great amount of criticism for replicating conventional banking. Recently Chong and Liu (2009) and Chevik and Charap (2011) have claimed that Islamic investment rates are pegged to interest rates. However Granger causality and cointegration tests show that this claim does not have a strong basis. Islamic investment rates and interest rates display short-run co-movements, nevertheless it is still not possible to argue that they are tied in the long-run. Seven out of eight sets of series of different maturities and currency groups for Turkey were evaluated and did not show any cointegration.

Tests of Financial Market Contagion: Evolutionary Cospectral Analysis Versus Wavelet Analysis

This paper examines the co-movements dynamics between OCDE countries with the US and Europe. The core focus is to suggest advantageous techniques allowing the investigation with respect to time and frequency, namely evolutionary co-spectral analysis and wavelet analysis. Our study puts in evidence the existence of both long run and short-run co-movements. Both interdependence and contagion are well identified across markets; but with slight differences. Both investors and policymakers can derive worthwhile information from this research. Recognizing countries sensitivity to permanent and transitory shocks enables investors to select rational investment strategies. Similarly, policymakers can make safe crisis management policies.

A general to specific approach for constructing composite business cycle indicators

Combining economic time series with the aim to obtain an indicator for business cycle analyses is an important issue for policy makers. In this area, econometric techniques usually rely on systems with either a small number of series, N, or, at the other extreme, a very large N. In this paper we propose tools to select the relevant business cycle indicators in a “medium” N framework, a situation that is likely to be the most frequent in empirical works. An example is provided by our empirical application, in which we study jointly the short-run co-movements of 24 European countries. We show, under not too restrictive conditions, that parsimonious single-equation models can be used to split a set of N countries in three groups. The first group comprises countries that share a synchronous common cycle, a non-synchronous common cycle is present among the countries of the second group, and the third group collects countries that exhibit idiosyncratic cycles. Moreover, we offer a method for constructing a composite coincident indicator that explicitly takes into account the existence of these various forms of short-run co-movements among variables.

Common trends and common cycles among interest rates of the G7-countries

Both, from a macroeconomic modeling perspective, as well as for a policy point of view, there has recently been a renewed interest in the cyclical and long-run comovement of interest rates. In this paper we re-investigate the long- and short-run comovements in the G7-countries by conducting tests for cointegration, common serial correlation and codependence with nominal and real interest rates, using quarterly data from 1975 to 2010. Overall, we find only little evidence of comovements. Common trends are occasionally observed, but the majority of interest rates are not cointegrated. Although some evidence for codependence of higher order is found in the pre-Euro area sample, common cycles appear to exist only in rare cases. We argue that some earlier, more positive findings are difficult to reconcile due to differing assumptions about the underlying stochastic properties of interest rates. We conclude that they cannot be generalized for all interest rates, time periods, and reasonable alternative estimation procedures.

A General to Specific Approach for Constructing Composite Business Cycle Indicators

Combining economic time series with the aim to obtain an indicator for business cycle analyses is an important issue for policy makers. In this area, econometric techniques usually rely on systems with either a small number of series, N, (VAR or VECM) or, at the other extreme, a very large N (factor models). In this paper we propose tools to select the relevant business cycle indicators in a medium N framework, a situation that is likely to be the most frequent in empirical works. An example is provided by our empirical application, in which we study jointly the short-run co-movements of 24 European countries. We show, under not too restrictive conditions, that parsimonious single-equation models can be used to split a set of N countries in three groups. The first group comprises countries that share a synchronous common cycle, a non-synchronous common cycle is present among the countries of the second group, and the third group collects countries that exhibit idiosyncratic cycles. Moreover, we offer a method for constructing a composite coincident indicator that explicitly takes into account the existence of these various forms of short-run co-movements among variables.

Dynamic price dependence of Canadian and international art markets: an empirical analysis

Although the market for Canadian paintings is now of substantial magnitude, with several works having recently been sold for well over a million dollars, it remains true that with very few exceptions, the works of Canadian painters are bought and sold only in Canada and seem to be held only by Canadian collectors. This market can thus be viewed as largely local, and it is therefore not clear whether there should be any linkage between price movements for Canadian art and those for the mainstream international market in old master, impressionist, and modern art. This article investigates the presence and nature of such time series dependence econometrically, both in terms of long-term trends as reflected in the co-integrating relationship between Canadian and the international market, and in terms of short-run co-movements as represented in correlations. The possibility that the local market “follows” the international one is also considered through an analysis of Granger causality. For Canadian art prices, we use a new hedonic index that has been computed using an updated version of the dataset of Hodgson and Vorkink (Can J Econ 37:629–655, 2004), while for the international prices, we use an index provided by Mei and Moses (Am Econ Rev 92:1656–1668, 2002).

International stock market indices comovements: a new look

ABSTRACTThis study accounts for the time‐varying pattern of price shock transmission, exploring stock market linkages using continuous time wavelet methodology. In order to sustain and improve previous results regarding correlation analysis between stock market indices, namely FTSE100, DJIA30, Nikkei225 and Bovespa, we extend here such analysis using the Coherence Morlet Wavelet, considering financial crisis episodes.Results indicate that the relation among indices was strong but not homogeneous across scales, that local phenomenon's are more felt than others in these markets and that there seems to be no quick transmission through markets around the world, but yes a significant time delay. The relation among these indices has changed and evolved through time, mostly due to financial crisis that occurred at different time periods. Results also favor the view that geographically and economically closer markets exhibit higher correlation and more short run comovements among them. Strong comovement is mostly confined to long‐run fluctuations favoring contagion analysis. Copyright © 2011 John Wiley & Sons, Ltd.

Dynamic Price Dependence of Canadian and International Art Markets: An Empirical Analysis

Although the market for Canadian paintings is now of substantial magnitude, with several works having recently sold for well over a million dollars, it remains true that with very few exceptions, the works of Canadian painters are bought and sold only in Canada and held only by Canadian collectors. This market can thus be viewed as almost exclusively local, and it is therefore not clear that there should be any linkage between price movements for Canadian art and those for the mainstream international market in old master, impressionist, and modern art. This paper investigates the presence and nature of such time series dependence econometrically, both in terms of long term trends as reflected in the co-integrating relationship between Canadian and the international market, and in terms of short-run co-movements as represented in correlations. The possibility that the local market follows the international one is also considered through an analysis of Granger-Causality. For Canadian art prices we use a new hedonic index that has been computed using an updated version of the data set of Hodgson and Vorkink (2004), while for the international prices, we use an index provided by Mei and Moses.

The price linkages between the equity fund price levels and the stock markets: Evidences from cointegration approach and causality analysis of Hong Kong Mandatory Provident Fund (MPF)

This paper is the first study to examine the short and long term price level linkages between the equity funds under the Hong Kong Mandatory Provident Fund (MPF) scheme and the benchmark indices proxied by different indices designed by the Hong Kong Investment Fund Association (HKIFA) over the period 2001–2008. Cointegration test is used to identify the long run relationship between the price levels and the stock market index, short run relationship between them is analyzed by the Granger causality test. We find that there is 56.43% of the equity funds have their price levels cointegrated with stock market index. In the short run, the Granger causality test indicates that some funds' price levels have both long and short run comovements with the stock market indices; on the other hand, some equity funds are found to have short run comovements with the stock market index but no long run comovements with the index, this indicates that some equity fund managers have ever tried to design their portfolios trying to win the market. Cointegration analysis is also done to investigate the long run relationship between the price levels of non-Hong Kong equity fund price levels and the local stock market index, Hang Seng Index, to evaluate the existence of benefit from global diversification by investing in the foreign equity funds. The results indicate that the scheme participants may have global diversification benefit by investing in US and Japanese equity funds.

The Price Linkages between the Equity Fund Price Levels and the Stock Markets: Evidences from Cointegration Approach and Causality Analysis of Hong Kong Mandatory Provident Fund (MPF)

This paper is the first study to examine the short and long term price level linkages between the equity funds under the Hong Kong Mandatory Provident Fund (MPF) scheme and the benchmark indices proxied by different indices designed by the Hong Kong Investment Fund Association (HKIFA) over the period 2001 – 2008. Cointegration test is used to identify the long run relationship between the price levels and the stock market index, short run relationship between them is analyzed by the Granger causality test. We find that there is 56.43% of the equity funds have their price levels cointegrated with stock market index. In the short run, the Granger causality test indicates that some funds’ price levels have both long and short run comovements with the stock market indices; on the other hand, some equity funds are found to have short run comovements with the stock market index but no long run comovements with the index, this indicates that some equity fund managers have ever tried to design their portfolios trying to win the market. Cointegration analysis is also done to investigate the long run relationship between the price levels of non-Hong Kong equity fund price levels and the local stock market index, Hang Seng Index, to evaluate the existence of benefit from global diversification by investing in the foreign equity funds. The results indicate that the scheme participants may have global diversification benefit by investing in US and Japanese equity funds.