Relationship between macroeconomic variables and stock market indices: cointegration evidence from stock exchange of Singapore’s all-S sector indices

The relationship between macroeconomic variables and stock market returns is, by now, well-documented in the literature. However, a void in the literature relates to examining the cointegration between macroeconomic variables and stock market’s sector indices rather than the composite index. Thus in this paper we examine the long-term equilibrium relationships between selected macroeconomic variables and the Singapore stock market index (STI), as well as with various Singapore Exchange Sector indices—the finance index, the property index, and the hotel index. The study concludes that the Singapore’s stock market and the property index form cointegrating relationship with changes in the short and long-term interest rates, industrial production, price levels, exchange rate and money supply. Implications of the study and suggestions for future research are provide

Modelling Small Economy Exports: The Case of Singapore

This paper sheds further light on the debate spearheaded by Riedel (1988) on the specification of a small country export function. The theoretical and empirical analyses in the paper show that while the price-taker assumption cannot be rejected, the export function for Singapore should not be construed as a standard export supply equation. As argued by Kapur (1983) instead, it is an export function with both demand and supply factors playing a role. We arrived at the final model specification by taking into consideration changes in the import content of exports over time. The paper also provides a new methodology for deriving a quarterly series of manufacturing net capital stock.price taker, demand constraint, export function, import content, restricted cointegrating space

Random walks and market efficiency in Chinese and Indian equity markets

Hypothesis of Market Efficiency is an important concept for the investors across the globe holding diversified portfolios. With the world economy getting more integrated day by day, more people are investing in global emerging markets. This means that it is pertinent to understand the efficiency of these markets. This paper tests for market efficiency by studying the impact of global financial crisis of 2008 and the recent Chinese crisis of 2015 on stock market efficiency in emerging stock markets of China and India. The data for last 20 years was collected from both Bombay Stock Exchange (BSE200) and the Shanghai Stock Exchange Composite Index and divided into four sub-periods, i.e. before financial crisis period (period-I), during recession (period-II), after recession and before Chinese Crisis (periodIII) and from the start of Chinese crisis till date (period- IV). Daily returns for the SSE and BSE were examined and tested for randomness using a combination of auto correlation tests, runs tests and unit root tests (Augmented Dickey-Fuller) for the entire sample period and the four sub-periods. The evidence from all these tests supports that both the Indian and Chinese stock markets do not exhibit weak form of market efficiency. They do not follow random walk overall and in the first three periods (1996 till the 2015) implying that recession did not impact the markets to a great extent, although the efficiency in percentage terms seems to be increasing after the global financial crisis of 2008

Forecasting Business Cycles in a Small Open Economy: A Dynamic Factor Model for Singapore

We apply multivariate statistical methods to a large dataset of Singapore’s macroeconomic variables and global economic indicators with the objective of forecasting business cycles in a small open economy. The empirical results suggest that three common factors are present in the time series at the quarterly frequency, which can be interpreted as world, regional and domestic economic cycles. This leads us to estimate a factor-augmented vector autoregressive (FAVAR) model for the purpose of optimally forecasting real economic activity in Singapore. By taking explicit account of the common factor dynamics, we find that iterative forecasts generated by this model are significantly more accurate than direct multi-step predictions based on the identified factors as well as forecasts from univariate and vector autoregressions.business cycles; principal components; dynamic factor model; factor-augmented VAR; forecasting; Singapore

Fragmentation and East Asia’s Information Technology Trade

This paper studies the growth and determinants of information technology (IT) trade in the Asia-Pacific region. We argue that the rise of IT trade must be understood within the context o increasing vertical fragmentation of production processes that has occurred over the past two decades. To evaluate this empirically, we estimate a set of pooled bilateral IT export equations for eight Asian countries, the U.S. and the E.U., where FDI inflows are introduced as a proxy for fragmentation. We apply a panel cointegration approach that allows for heterogeneity in short-run dynamics and in fixed effects. Consistent with production fragmentation, we find that the evolution of IT trade can be explained in part by traditional income and relative price effects but also by FDI inflow.fragmentation, information technology, FDI and trade, trade elasticities, panel data

Monetary Policy and Asset Prices in a Small Open Economy: A Factor-Augmented VAR Analysis for Singapore

The ongoing global financial turmoil has revived the question of whether central bankers ought to tighten monetary policy preemptively in order to head off asset price misalignments before a sudden crash triggers financial instability. This study explores the issue of the appropriate monetary policy response to asset price swings in the small open economy of Singapore. Empirical analysis of monetary policy based on standard VAR models, unfortunately, is often hindered by the use of sparse information sets. To better reflect the extensive information monitored by Singapore’s central bank, including global economic indicators, we augment a monetary VAR model with common factors extracted from a large panel dataset spanning 122 economic time series and the period 1980q1 to 2008q2. The resulting FAVAR model is used to assess the impact of monetary policy shocks on residential property and stock prices. Impulse response functions and variance decompositions suggest that monetary policy can potentially be used to lean against asset price booms in Singapore.Monetary Policy; Asset Prices; Dynamic Factors; Vector Autoregression

Determinants of German Foreign Direct Investment in Latin American and Asian Emerging Markets in the 1990s

Many empirical studies in the area of foreign direct investment (FDI) exclusively focus on flows between industrialized countries. This article makes a contribution to the still relatively sparse literature on FDI in emerging markets by estimating determinants of German FDI flows to Latin America and Asia during the past decade. Using data contained in a newly available Bundesbank microdatabase, an FDI flow variable, constructed from year-to-year differences in FDI stocks adjusted for certain otherwise distorting factors, is empirically tested with respect to several exogenous variables previously found to be significant in the literature. These include so-called non-traditional factors such as country risk and agglomeration effects which are widely regarded as influential for FDI in emerging market economies. This study therefore focuses on estimating the effects of various risk measures and finds that country risk, and partially political risk, is indeed detrimental to investments of German enterprises. Moreover, German FDI in Latin America are found to have been market-seeking while those in emerging Asia tended to exploit low factor costs. Methodically, this paper uses the SUR estimation technique which allows for the contemporaneous correlation of disturbances as well as first-order autocorrelation of the time series disturbances and cross-sectional heteroskedasticity. In arriving at a parsimonious regression for each region, an Extreme Bounds Analysis (Leamer, 1983 & 1985) is performed to select individual variables robust to the inclusion of other explanatory variables. Making empirical use of German firm-level data, additional estimations are performed for direct investment of the manufacturing sector and three of its sub-sectors. Regarding the latter, the hypothesis that capital-intensive industries react particularly strongly to the changes in the regulatory environment of the host country is confirmed by the data. -- Viele empirische Studien im Bereich der ausländischen Direktinvestitionen (?foreign direct investment? ? ?FDI?) beziehen sich ausschließlich auf Investitionsströme zwischen Industrieländern. Dieses Arbeitspapier trägt zu der noch vergleichsweise spärlichen Literatur zu Direktinvestitionen in Schwellenländern bei. Es schätzt die Determinanten deutscher FDIStröme in ausgewählten ?Emerging Markets? während der letzten Dekade. Mit Hilfe von Daten, die in einer seit kurzem verfügbaren Mikrodatenbank der Bundesbank enthalten sind, wird eine Stromgröße, die sich aus den Bestandsveränderungen der Direktinvestitionsbestände errechnet und die um verzerrende Einflüsse bereinigt wird, empirisch hinsichtlich verschiedener exogener, in der Literatur als signifikant befundener Variablen überprüft. Diese schließen sogenannte nicht-traditionelle Faktoren wie Länderrisiko und Agglomerationseffekte ein, die allgemein als einflussreich für Direktinvestitionen in Schwellenländern erachtet werden. Die vorliegende Studie konzentriert sich demnach auf die Schätzung der Bedeutung verschiedener Risikomaße und findet, dass das Länderrisiko und teilweise auch das politische Risiko den Investitionen deutscher Unternehmen abträglich sind. Außerdem wird gezeigt, dass deutsche Direktinvestitionen in Lateinamerika eher markterschließend waren, während jene in den Schwellenländern Asiens stärker die Nutzung niedriger Faktorkosten zum Ziel hatten. Methodisch wird die SUR Schätzmethode angewandt, die eine Berücksichtigung gruppenweiser Korrelation der Störgrößen, eines autoregressiven Prozesses erster Ordnung und Heteroskedastizität ermöglicht. Um ein sparsames Modell schätzen zu können, wird eine ?Extreme Bounds?-Analyse nach Leamer (1983 & 1985) durchgeführt, welche die Auswahl von solchen Variablen bezweckt, deren Einfluss gegen die Einbeziehung anderer exogener Variablen robust ist. Zudem werden Einzeldaten deutscher Firmen genutzt, um weitere Schätzungen der Direktinvestitionen des Verarbeitenden Gewerbes und dreier Untersektoren durchzuführen. Bezüglich Letzterer kann die Hypothese, dass kapitalintensive Sektoren besonders stark auf Änderungen im regulatorischen Umfeld der Empfängerländer reagieren, mit Hilfe der Daten bestätigt werden.foreign direct investment,emerging markets,country risk,panel data analysis

What Lies Beneath: Foreign Exchange Rate Exposure, Hedging and Cash Flows

This paper presents results from an in-depth analysis of the foreign exchange rate exposure of a large nonfinancial firm based on proprietary internal data including cash flows, derivatives and foreign currency debt, as well as external capital market data. While the operations of the multinational firm have significant exposure to foreign exchange rate risk due to foreign currency-based activities and international competition, corporate hedging mitigates this gross exposure. The analysis illustrates that the insignificance of foreign exchange rate exposures of comprehensive performance measures such as total cash flow can be explained by hedging at the firm level. Thus, the residual net exposure is economically and statistically small, even if the operating cash flows of the firm are significantly exposed to exchange rate risk. The results of the paper suggest that managers of nonfinancial firms with operations exposed to foreign exchange rate risk take savvy actions to reduce exposure to a level too low to allow its detection empirically.Foreign exchange rates, exposure, risk management, cash flow, derivatives, corporate finance