Does Intra-Regional Trade Matter in Regional Stock Markets?: New Evidence from Asia-Pacific Region

Sei-Wan Kim () and Moon Jung Choi ()
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Sei-Wan Kim: Department of Economics, Ewha Woman's University
Moon Jung Choi: Economic Research Institute, The Bank of Korea

No 2016-11, Working Papers from Economic Research Institute, Bank of Korea

Abstract: We provide new evidence on the relationship between bilateral trade and stock market performance over Asia-Pacific region. Using three regional blocs in Asia-Pacific region -- the Far Eastern bloc, the Chinese bloc, and the Australian bloc, we examine two main questions: whether trade linkages between countries affect stock returns of trading partners and whether stock markets of trading partners are interdependent. By incorporating two distinct dynamic properties of regime shifting and cointegration in intra-regional trade and stock market index, we employ a newly suggested multi-variable smooth transition autoregressive vector error correction model (STAR-VECM). A series of STAR-based tests reveals the evidence that bilateral trade significantly Granger-causes stock returns in Asia-Pacific region with the effect varying over regime changes. Among three blocs, Far Eastern bloc displays the most pronounced complementary relationship between trade growth and stock returns compared to other blocs. We also find evidence of stock market synchronization within each region.

Keywords: Stock market synchronization; Regional trade; Regime change; Smooth transition autoregressive model (search for similar items in EconPapers)
JEL-codes: C40 C51 F15 G14 (search for similar items in EconPapers)
Pages: 62 pages
Date: 2016-07-27
New Economics Papers: this item is included in nep-int and nep-sea
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http://papers.bok.or.kr/RePEc_attach/wpaper/english/wp-2016-11.pdf Working Paper, 2016 (application/pdf)

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