Stock and foreign exchange markets in the Pacific Basin Rim

Abstract

The thesis examines the stock and foreign exchange markets of a group of Pacific Basin countries. The main purpose is to investigate the role of foreign ownership restrictions and taxes on potential linkages between these markets, and their interrelations with the rest of the world. The overall analysis highlights the presence of substantial financial links at the regional and global level. In particular, it shows close financial links even for markets with extensive capital controls. It also finds linkages between their stock and foreign exchange markets and that foreign currency risk is a significant component of domestic stock returns. When examining for potential sources of these close financial links, the research indicates that Country Funds have provided indirect ways of foreign participation in the local stock markets and contributed to these financial links. Furthermore, the thesis also emphasised the role of economic integration. of the Pacific Basin countries for their financial integration. The study found that the Asian financial crisis of mid 1997 had some effects on the financial links of the Pacific Basin Rim at the regional and global level. In addition, while the turmoil has increased the economic integration at the regional level, it has reduced economic integration with the U. S. However, the thesis shows that neither Japan, nor the U. S., dominates the Pacific Basin Rim. Some countries, such as Thailand, present closer links with the U. S., and others, such as Korea and Taiwan, with Japan. The evidence provided in the thesis has implications for international portfolio diversification and for the use of foreign exchange restrictions to isolate local capital markets from world market influences