The aim of my research is to understand how a sotck market in one country reacts to a  shock  from a stock market in another country, using the Generalised autoregressive conditional heterosedasticity model (GARCH)https://ro.ecu.edu.au/ecuposters/1013/thumbnail.jp

Do, Anh

English

Research Online @ ECU

Edith Cowan UniversityResearch OnlineECU Posters Other Collections2017A story of the red lanternAnh DoEdith Cowan University, a.do@ecu.edu.auFollow this and additional works at: http://ro.ecu.edu.au/ecupostersPart of the Finance and Financial Management CommonsOriginally published asDo, A. (201). A story of the red lantern. Poster presented at ECU Research Week, 19th September. SchoolOf Business and Law, Edith Cowan University.This Book is posted at Research Online.http://ro.ecu.edu.au/ecuposters/15Recommended CitationDo, Anh, "A story of the red lantern" (2017). ECU Posters.http://ro.ecu.edu.au/ecuposters/15C H A P T E R  1The Red Lantern The Research Preliminary analysisa story ofThe Red Lanternof Sima YanFrom 266-290 BC., China was ruledby Emperor Wu (also known asSima Yan). He was the first King ofthe Jin Dynasty that conqueredThree Kingdoms. Apart from hisgreat talents in politics, T H E  H A R E M  A  P R E L I M I N A R Y  A N A L Y S I S  O N  D A I L Y  P R I C E S  O F  S T O C K  M A R K E T S  I N  C H I N A  A N D  T H E  U . S .  F O U N D  T H A T  B O T H  T I M E S  S E R I E S  E X H I B I T :legends boasted of his incredible potency among 10,000 concubines.HOW A STOCK MARKET IN ONE COUNTRY REACTS TO A "SHOCK" FROM A STOCK MARKET IN ANOTHER COUNTRY. Similar to the red lantern story,however, the venue of my research is not the harem of the Emperor but the stock markets. The aim of my research is to understand T h e  t e s t  i s  p e r f o r m e d  f o r  a  p a i r  o f  m a r k e t s  ( b i v a r i a t e  t e s t )  b e t w e e n  C h i n a  a n d  o t h e r  g l o b a l  e q u i t i e s  e . g .  t h e  U . S . ,  U . K . ,  G e r m a n y ,  J a p a n ,  A u s t r a l i a ,  a n d  t h e  A S E A N -5  c o u n t r i e s  ( S i n g a p o r e ,  T h a i l a n d ,  M a l a y s i a ,  P h i l i p p i n e s   &  I n d o n e s i a )  f r o m  F e b r u a r y  2002   t o   J u n e  2017 . W e  e x p e c t  t h r e e  t y p e s  o f  r e l a t i o n s h i p s :NON-NORMALITYAggressiveA stock market in one country reacts stronglyto a shock from a stock market in anothercountry1PassiveA stock market in one country is impacted bya shock from another country but not viceversa. 2IgnoranceA shock from a stock market in one country isunlikely to have a significant impact on a stockmarket in another country.  3First-difference: Daily prices of each stock market in the sample are downloaded from Bloomberg and converted to natural logarithm. Daily return at time t of stock market i is the change of daily prices (Pi) in log form of two consecutive days, expressed as Ri ,t = ln(Pi ,t) - ln(Pi ,t-1)NELSON ( 1 9 9 1 )  &  ENGLE  ( 1 9 82 )Generalised Autoregressive Conditional Heteroscedasticity model is employed to predict daily stock returns (first moment) at any single day based on all information that includes the unexpected news from a stock market in another country to one day before. It can also capture the joint distribution of volatility of daily stock returns (second moment) between two markets. The SheepSince The Emperor had so many beautiful ladies, every night he sat in the cart drawn by a sheep and let the sheep take him to a room by chance. A red lanternis raised in front of the room of that lucky lady during the night.IF  WE ASSUME THE SHEEP WERE NOT CONTROLLED BYANY FACTORS RATHER THAN THEIR OWN DISCRETIONTHEN THE RESULTS OF THEIR MOVESWHICH WERE PRESENTED BY THE REDLANTERNS WERE UNPREDICTABLE.which is  commonl ly   referred to an unexpected news that is  e i ther good or bad.GARCHshock in capital marketsThe red lantern is  considered s imi lar   to aT h e  d i s t r i b u t i o n s  h a v e  f a t  t a i l s  a n d  n e g a t i v e  s k e w n e s s .NON-STATIONARITYT h e  m e a n  a n d  v a r i a n c e s  a r e  t i m e - v a r y i n g .  T h e r e f o r e ,  w e  u s e  t h e  f i r s t - d i f f e r e n c e  t e c h n i q u e  t o  c o n v e r t  t h e s e  s e r i e s  t o  s t a t i o n a r i t y .SERIAL CORRELATIONL a r g e  ( s m a l l )  c h a n g e s  i n  d a i l y  p r i c e  a r e  f o l l o w e d  b yl a r g e  ( s m a l l )  c h a n g e s  w h i c h  i s  c o m m o n l y  o b s e r v e d  i n  f i n a n c i a l  t i m e  s e r i e s .  T h i s  p h e n o m e n o n   d i s m i s s e s  i n  f i r s t  d i f f e r e n c e  l o g - r e t u r n s .HETEROSKEDASTICITYA  b i v a r i a t e  m o d e l  b e t w e e n  s t o c k  r e t u r n s  o f  t w o  m a r k e t s  i s  c o n s t r u c t e d  u s i n g  t h e  d a i l y  r e t u r n  o f  o n e  m a r k e t  a t  t i m e  t   -  1  ( o n e  l a g )  t o  p r e d i c t  t h e  d a i l y  r e t u r n  o f  a n o t h e r  m a r k e t  a t  t i m e  t .  O t h e r  f a c t o r s  t h a t  c a n  e x p l a i n  t h e  v a r i a t i o n  i n  t h e  d e p e n d e n t  v a r i a b l e  b u t  n o t  i n c l u d e d  i n  t h e  m o d e l  i s  r e p r e s e n t e d  b y  a n  e r r o r  t e r m  ( a l s o  c a l l e d  r e s i d u a l  f a c t o r s ) .  H e t e r o s k e d a s t i c i t y  r e f e r s  t o  t h e  e v e n t  w h e r e  t h e  i n d e p e n d e n t  v a r i a b l e  i sr e l a t e d  t o  t h e  r e s i d u a l  f a c t o r s ,  w h i c h  i s  f o u n d  b e t w e e n  C h i n a  a n d  t h e  U . S .   S i n c e  G A R C H  i s  d e s i g n e d  t o  d e a l  w i t h  t h i s  i s s u e ,  t h e  m o d e l  i s  c o n s i d e r e d  a s  a p p r o p r i a t e  t o  e x a m i n e  t h e  r e l a t i o n s h i p  b e t w e e n  t h e s e  m a r k e t s .Unknown structural breaksBA I - PERRON ( 1 9 98 )Bai-Perron (1998) test found two breaks for each market that are coincident with the Global Financial Crisis time frame. The first one is July 2007 and the second one is March 2009 for the U.S. while China's breaks are two months behind. Therefore, data is subdivided into three sub-periods according to these breaks.C O N T R I B U T I O N  The findings can provide important inputs to calculate the asset ratio for an optimal international investment portfolio. In simple words, it can help to determine if adding U.S. equities to an investment portfolio that includes Chinese equities can reduce the portfolio risk or not (and vice versa).of the studyREFERENCESBai, J., & Perron, P. (1998). Estimating and testing linear models with multiplestructural changes. Econometrica, 47-78.  Engle, R. F. (1982). Autoregressive conditional heteroscedasticity with estimatesof the variance of United Kingdom inflation. Econometrica: Journal of theEconometric Society, 987-1007.  Nelson, D. B. (1991). Conditional heteroskedasticity in asset returns: A newapproach. Econometrica: Journal of the Econometric Society, 347-370.  School of Business & Law Anh DoEdith Cowan University

A story of the red lantern

https://ro.ecu.edu.au/cgi/viewcontent.cgi?article=1013&amp;context=ecuposters

A story of the red lantern

Abstract

Similar works

Full text

Available Versions

Research Online @ ECU