An Asian Study of the Monetary and Banking Liquidity Impact on Share Prices

Following Friedman’s hypothesis that credit expansion will follow a monetary and liquidity binge, we used data from 1968-2012 in Asia (Japan, Korea, China and India) to explore this hypothesis.Our results from applying single and cointegration equations provided empirical support to the above hypothesis. This liquidity binge following a monetary impact on share prices was tested in four major Asian economies.As per the theory’s prediction, monetary changes led to a positive banking liquidity effect, based on lengthy quarterly equations using the dynamic OLS method. We also showed that banking liquidity changes have a significant positive effect on share prices, after controlling for the effects of earning changes, regime changes and the global financial crisis. These findings, obtained after solutions to serious econometric issues in existing studies, appear to provide a clear verification of theory on the monetary effect on banking liquidity and banking liquidity’s effect on share prices

ASEAN financial market integration - a rainbow on the horizon?

This paper reveals the degree of integration of financial markets in selected ASEAN economies. Few studies on this topic provide evidence that integration of the region’s financial markets remains limited, despite the steady growth of intra-ASEAN trade (the share of intra-ASEAN trade to total ASEAN trade increased from 17% in 1990 to 24% in 2013). Over time, while the demand for financial services to support economic activities has led to financial system growth alongside economic development, the financial services appear to have less integration. We applied correlation and cointegration analyses to study financial integration over two periods (before and after the Asian financial crisis of three countries, namely Malaysia, Singapore and Thailand and three non-ASEAN countries, namely Hong Kong, Japan and the USA). Pairwise correlation of money-market rates appear to have increased from 8 (pre-crisis) to 15 (post-crisis) significantly. The multivariate co-integration test suggests the presence of at least two cointegrating equations (pre-crisis and post-crisis) in the money and stock markets of the ASEAN region

Money supply, interest rate, liquidity and share prices: A test of their linkage

This paper reports new evidence of a liquidity effect on share prices from money supply changes. Money supply impacts on interest rate and liquidity were first proposed in 1969 and there is evidence that money supply increase leads to interest rate decline. Yet the proposition that money supply increase should lead to liquidity surge – thus to credit expansion – has yet received unanimous empirical support. Using quarterly data over 1968-2011, our results from a two-stage simultaneous solution of a system of equations indicate that money supply changes lead to a positive liquidity effect, as per the theory prediction. By extending the liquidity equation to asset prices, we also show that liquidity change has a significant positive effect on share prices, after controlling the effect of earnings. These findings, obtained after solutions to serious econometric issues of existing studies, appear to provide a clear verification of theory on the money supply effect on liquidity and on asset price

A test of their linkage between money supply, liquidity, and share prices

This thesis reports new evidence of a liquidity effect from money supply changes. From evidence, the money supply increases proposed by Friedman (1969) first lead to interest rate declines and inflation increases. Yet the proposition that money supply increase leads to liquidity surge and credit expansion in the banking sector – has not yet received unanimous empirical support. Monetary transmission mechanism is more and more turning to the credit channel to trace how money affects prices. That money is endogenously determined as in the writings of post-Keynesian (PK) economists, will be examined in this thesis by applying a 3-equations model. The empirical tests of the theories are conducted using quarterly data over 1960 and 2011 for the G-7 countries: Canada, France, Germany,Italy, Japan, the United Kingdom (UK) and the United States (US). These tests are conducted to determine whether (1) money is endogenous (bidirectional) or exogenous (unidirectional), (2) money supply causes liquidity, and (3) liquidity causes share price to change. The empirical tests are conducted after the usual statistical tests (unit root,Granger causality, Johansen cointegration tests and VECM) are done on whether the data are stationary and cointegrated. The results reported in this thesis are: i) bidirectional causality exists between GDP and money supply suggesting that money is endogenous; ii) there is a difference between long-term and short-term causality – as in the cases of Canada, Italy, Japan and the US. In contrast, France’s and Germany’s monetary policies appear to be in accordance with the monetarist view; iii) liquidity is found to be a significant variable in most cases except Canada 2 (in sub-period 1991:1 to 2007:1) and Italy; and iv) for most G-7 countries, there is a relationship between money supply and share returns. Finally, the findings using the panel data estimation method show that there is a positive relationship between money supply growth and share returns: it is negative between share returns and money supply growth, due to central bank changing interest rates to curb inflation. In this context, there is a bidirectional positive relation between GDP growth and money supply growth, which supports the PK theory of endogenous money. Thus, the money-to-share-price-returns relation is founded on money being endogenous. The findings of the thesis provides a link between money supply,liquidity and the real economy, unlike the more narrower-focused asset pricing theories that purport to explain asset prices as determined by just the financial factors

Money supply, interest rate, liquidity and share prices:A test of their linkage

This paper reports new evidence of a liquidity effect on share prices from money supply changes. Money supply impacts on interest rate and liquidity were first proposed in 1969 and there is evidence that money supply increase leads to interest rate decline. Yet the proposition that money supply increase should lead to liquidity surge – thus to credit expansion – has yet received unanimous empirical support. Using quarterly data over 1968-2011, our results from a two-stage simultaneous solution of a system of equations indicate that money supply changes lead to a positive liquidity effect, as per the theory prediction. By extending the liquidity equation to asset prices, we also show that liquidity change has a significant positive effect on share prices, after controlling the effect of earnings. These findings, obtained after solutions to serious econometric issues of existing studies, appear to provide a clear verification of theory on the money supply effect on liquidity and on asset price