The Sri Lankan stock market and the macroeconomy: an empirical investigation

Purpose – The purpose of this paper is to examine the causal relationships between stock prices and macroeconomic variables in Sri Lanka, in order to examine the validity of the semi-strong form of the efficient market hypothesis. Design/methodology/approach – The paper adopts unit roots and cointegration, error-correction modelling, variance decomposition analysis, and impulse responses analysis to examine the causal relationship between six macroeconomic variables. Findings – The results indicate that there are both short and long-run causal relationships between stock prices and macroeconomic variables. These findings refute the validity of the semi-strong version of the efficient market hypothesis for the Sri Lankan share market and have implications for investors, both domestic and international. Originality/value – The paper addresses several methodological weaknesses in relation to unit root and cointegration tests which previous studies in the area of the paper have overlooked. Further, it uses more variables than those used in a previous study using Sri Lankan data

The Causal Relationship Between Economic Policy Uncertainty and Stock Returns in China and India: Evidence from a Bootstrap Rolling Window Approach

This article applies a bootstrap rolling-window causality test to assess the causal relationship between economic policy uncertainty (EPU) and stock returns in China and India. Empirical literature examining causality between two time series may suffer from inaccurate results when the underlying full-sample time series have structural changes. However, the bootstrap rolling-window approach enables us to identify possible time-varying causalities between time series based on sub-sample data. Using a twenty-four-months rolling window over the period 1995:02 to 2013:02 in China and 2003:02–2013:02 in India, we do find that there are bidirectional causal relationships between EPU and stock returns in several sub-periods rather than in the whole sample period. However, the association between EPU and stock returns is, in general, weak for these two emerging countries. Our findings have important implications for policy makers and investors.http://www.tandfonline.com/loi/mree202017-09-30hb2016Economic

Asset price volatility and financial contagion: analysis using the MS-VAR framework

This paper investigates volatility linkages and financial contagion via the asset price channel from the US and Europe to East Asia during the 2007–2011 global financial crisis. Following crisis contingent theories, financial contagion is modeled as the structural change in transmission mechanism after a shock in one country (shift-contagion). Using Markov-switching vector autoregression and multivariate unconditional correlation tests, this study not only addresses the theoretical assumptions about multiple equilibria and nonlinear linkages, but also handles the problems of heteroskedasticity, endogeneity, simultaneous equations and sample selection bias. The empirical results show a significant nonlinear dynamic behaviour of asset returns and volatility interactions across-countries. The volatility spillovers from the US and Europe to East Asian financial markets were mainly caused by fundamental links, apart from in Thailand, which experienced shift-contagion caused by investor behaviours. There is also evidence of the intensified intra-regional linkages in the event of an external shock

Do Global Risk Perceptions Play a Role in Emerging Market Equity Return Volatilities?

This paper investigates whether global risk perceptions lead emerging market return volatilities. In so doing, we analyzed the period of interest in three parts to determine the effects of the changes in global risk perceptions on the volatility of emerging markets. We uncovered volatility spillover from risk perceptions to the MXEF returns before the crisis. Our results show that all the effects on emerging market volatilities are severed in 2008, during which MXEF follows a downward trend. However, we observe that volatility transmission emerges during the recovery period of MXEF again. Hence, risk perceptions should be considered while analyzing emerging markets