The Factors Affecting Stock Market Volatility and Contagion

203 Pages·2015·1.45 MB·English

The Factors Affecting Stock Market Volatility and Contagion:
Thailand and South-East Asia Evidence

Thesis submitted in partial fulfilment of the requirements for the degree of
Doctorate of Business Administration

by

Paramin Khositkulporn

School of Business
Victoria University
Melbourne

February 2013
Declaration

I, Paramin Khositkulporn, declare that the DBA thesis entitled “The Factors Affecting Stock
Market Volatility and Contagion: Thailand and South-East Asia Evidence” is no more than
65,000 words in length including quotes and exclusive of tables, figures, appendices,
bibliography, references and footnotes. This thesis contains no material that has been
submitted previously, in whole or in part, for the award of any other academic degree or
diploma. Except where otherwise indicated, this thesis is my own work.

Paramin Khositkulporn Date

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Contents

Declaration ........................................................................................................................ ii
Contents ........................................................................................................................... iii
List of Tables .................................................................................................................... v
List of Figures ................................................................................................................. vii
List of Abbreviations ..................................................................................................... viii
Acknowledgements .......................................................................................................... xi
Abstract .......................................................................................................................... xiii

Chapter 1: Introduction........................................................................................................... 1

1.1 Research Background ................................................................................................. 1
1.2 Definition of Volatility and Contagion ....................................................................... 3
1.2.1 Volatility ......................................................................................................... 3
1.2.2 Contagion ....................................................................................................... 5
1.3 Research Questions and Research Objectives of the Study ........................................ 6
1.4 Hypothesis .................................................................................................................. 6
1.5 Statement of Significance ........................................................................................... 8
1.6 Contribution of the Research to Knowledge ............................................................... 8
1.7 Research Methodology ............................................................................................... 9
1.8 Thesis Structure ........................................................................................................ 11

Chapter 2: Literature Review ............................................................................................... 12

2.1 Introduction ............................................................................................................... 12
2.2 Stock Markets and Economic Performance in South-East Asia ............................... 12
2.3 Factors Affecting Stock Market Volatility ............................................................... 18
2.3.1 Oil Prices ...................................................................................................... 20
2.3.2 Effect of Oil Price on the Economy ............................................................. 22
2.3.3 Effect of Oil Price on Financial Market Volatility ....................................... 24
2.3.4 Uncertain Political Conditions ..................................................................... 28
2.3.5 How Do Political Events Relate to the Stock Market? ................................ 29
2.3.6 Thailand’s Political Events ........................................................................... 34
2.3.7 US Subprime Mortgage Loans ..................................................................... 38
2.3.8 Effect of Subprime Mortgages - Global Economy and Financial Market ... 39
2.3.9 Effect of Subprime Mortgages on the Thailand Economy and Financial
Market ..................................................................................................... 43
2.4 Volatility Definition and Models .............................................................................. 46
2.5 Contagion Definition, Contagion in Financial Markets and Measuring ................... 51
2.6 Problems and Limitations of Previous Research and Gaps in the Studies ............... 61
2.6.1 Volatility ....................................................................................................... 61
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2.6.2 Contagion ..................................................................................................... 62
2.7 Summary ................................................................................................................... 63

Chapter 3: Conceptual Framework and Methodology ....................................................... 64

3.1 Introduction ............................................................................................................... 64
3.2 Theoretical Framework ............................................................................................. 64
3.2.1 Development of the Theoretical Framework for Stock Market Volatility ... 65
3.2.2 Development of the Theoretical Framework on the Contagion Effect ........ 66
3.3 Conceptual Framework ............................................................................................. 67
3.4 Research Questions and Tested Hypotheses ............................................................. 68
3.4.1 Contribution of the Theoretical Framework ................................................. 69
3.5 Research Methodology ............................................................................................. 70
3.5.1 Research Approach ....................................................................................... 71
3.6 Methods .................................................................................................................... 72
3.6.1 Sample Identification ................................................................................... 72
3.6.2 Data Sources and Data Collection ................................................................ 74
3.7 Hypothesis Testing for Factors Affecting Thailand’s Stock Market Volatility ........ 76
3.7.1 Multiple Regression Model .......................................................................... 76
3.7.2 GARCH Model ............................................................................................. 77
3.7.3 Breusch-Pagan LM Test ............................................................................... 79
3.8 Hypothesis Testing for Contagion in South-East Asia ............................................. 80
3.8.1 Stationary and Non-Stationary Time Series ................................................. 80
3.8.2 Correlation Coefficient Test ......................................................................... 82
3.8.3 Granger Causality Test ................................................................................. 84
3.9 Summary ................................................................................................................... 85

Chapter 4: Research Results and Discussion ....................................................................... 87

4.1 Introduction ............................................................................................................... 87
4.2 Summary Statistics of Variables ............................................................................... 87
4.3 Multiple Regression Model ...................................................................................... 93
4.4 GARCH Model ......................................................................................................... 98
4.5 Hypothesis Testing and Discussion of Research Question 1 .................................. 112
4.6 Summary Statistics of Monthly Stock Market Returns from South-East Asia ....... 118
4.7 Correlation Coefficient Test ................................................................................... 121
4.8 Granger Causality Test ........................................................................................... 125
4.9 Hypothesis Testing and Discussion on Research Question 2 ................................. 129
4.10 Summary ............................................................................................................... 140

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Chapter 5: Conclusion and Limitations ............................................................................. 141

5.1 Introduction ............................................................................................................. 141
5.2 Conclusion on the Factors Affecting Stock Market Volatility ............................... 141
5.3 Conclusion on the Contagion Effect ....................................................................... 144
5.4 Limitations .............................................................................................................. 146
5.5 Recommendations for Future Research .................................................................. 147

References .............................................................................................................................. 148
Appendices ............................................................................................................................. 165
Appendix A: The Sample Variables Returns ................................................................ 165
Appendix B: Thailand and South-East Asia Stock Market Returns ............................. 169
Appendix C: GARCH Family of RSET for Low-Volatility Period ............................. 173
Appendix D: GARCH Family of RSET for High Volatility Period ............................. 178
Appendix E: ADF Unit Roots Tests ............................................................................. 184
Appendix F: Philips Perron Unit Roots Tests ............................................................... 192

v
List of Tables

Table 2.1: Index Performance of Major and South-East Asia Stock Markets 2008 ............... 13
Table 2.2: Growth Rate of Asia’s GDP Percentages Change ................................................. 14
Table 2.3: Overview of the World Economic Outlook Projections (Percentage Change) ...... 15
Table 2.4: South-East Asia Market Capitalisation, Share Turnover Velocity, P/E Ratio
and Market Yield .................................................................................................... 15
Table 2.5: Index Performance of Major and South-East Asia Stock Markets 2008 ............... 15
Table 2.6: Thailand’s Recent Political Events ........................................................................ 39
Table 4.1: Descriptive Statistics—Monthly Returns of Variables on Stock Index of
Thailand, February 1999 to October 2010 ............................................................. 84
Table 4.2a: Regression Results on Monthly Return, 1999:02 to 2010:10 (n=140) ................ 90
Table 4.2b: Regression Results of the Low-Volatility Period, 1999:02 to 2006:10 (n=92) ... 90
Table 4.2c: Regression Results of the High-Volatility Period, 2006:11 to 2010:10 (n=47) ... 91
Table 4.2d: Summary of Regression Results of the Full Data Set and Two Sub-samples ..... 92
Table 4.3: Breusch-Pagan LM Test Auxiliary Regression ..................................................... 93
Table 4.4: GARCH (1, 1) of SET, Period 1999M02 2010M10 (n=140) ................................ 94
Table 4.5: GARCH (2, 1) of RSET, Period 1999:03 to 2010:10 (n=140) .............................. 95
Table 4.6: GARCH (2, 2) of RSET, Period 1999:03 to 2010:10 (n=140) .............................. 96
Table 4.7: GARCH (3, 1) of RSET, Period 1999:03 to 2010:10 (n=140) .............................. 97
Table 4.8: GARCH (2, 3) of RSET, Period 1999:03 to 2010:10 (n=140) .............................. 97
Table 4.9: Schwarz Criterion of GARCH, Period 1999:03 to 2010:10 (n=140) .................... 98
Table 4.10a: GARCH (1, 1) of RSET, Period 1999:03 to 2006:10 (n=92) ............................ 99
Table 4.10b GARCH (2, 1) of RSET, Period 1999:03 to 2006:10 (n=92) ........................... 100
Table 4.11 GARCH (1, 2) of RSET, Period 2006:11 to 2010:10 (n=47) ............................. 102
Table 4.12: Summary of GARCH Results of the Full Dataset and Two Sub-samples ......... 104
Table 4.13a: ROIL with Regression and GARCH Models ................................................... 105
Table 4.13b: RBSI with Regression and GARCH Models ................................................... 105
Table 4.14: Descriptive Statistics of Stock Market Returns, February 1999 to October
2010 ...................................................................................................................... 110
Table 4.15: Unit Root Test Results for Monthly Series ........................................................ 112
Table 4.16a: Correlation Coefficients Test of Five Stock Markets and ROIL ..................... 113
Table 4.16b: Correlation Coefficients Test of Five Stock Markets and RBSI ...................... 114
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Table 4.16c: Correlation Coefficients Test of Five Stock Markets and RSP500 .................. 115
Table 4.17a: Granger Causality Test, Full Sample Period (n=138) ...................................... 116
Table 4.17b: Granger Causality Test, Low-Volatility Sample Period (n=90) ...................... 117
Table 4.17c: Granger Causality Test, High-Volatility Sample Period (n=45) ...................... 118
Table 4.18a: Summary of Correlation Results of the Full Dataset and Two Sub-samples ... 119
Table 4.18b: Summary of Granger Causality Results of the Full Dataset and Two Sub-
samples ................................................................................................................. 119
Table 4.19a: Summary of Correlation Results of the Full Dataset and Two Sub-samples ... 120
Table 4.19b: Summary of Granger Causality Results of the Full Dataset and Two Sub-
samples ................................................................................................................. 121
Table 4.20a: Summary of Correlation Results of the Full Dataset and Two Sub-samples ... 121
Table 4.20b: Summary of Granger Causality Results of the Full Dataset and Two Sub-
samples ................................................................................................................. 122
Table 4.21a: Summary of Correlation Results of the Full Dataset and Two Sub-samples ... 123
Table 4.21b: Summary of Granger Causality Results of the Full Dataset and Two sub-
samples ................................................................................................................. 123
Table 5.1: Summary a contagion results relating to the Multiple Regression and GARCH
models. ................................................................................................................. 130

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List of Figures

Figure 3.1: Conceptual framework. ......................................................................................... 64
Figure 4.1a: Time series of RSET. .......................................................................................... 84
Figure 4.1b: Histogram of RSET. ........................................................................................... 85
Figure 4.2a Time series of RBSI. ............................................................................................ 86
Figure 4.2b Histogram of RBSI. ............................................................................................. 86
Figure 4.3a Time series of ROIL. ........................................................................................... 87
Figure 4.3b Histogram of ROIL. ............................................................................................. 88
Figure 4.4a Time Series of S&P 500 Stock Index Returns (RSP500) .................................... 88
Figure 4.4b Histogram of RSP500. ......................................................................................... 89
Figure 4.5: Plots of monthly stock market returns from South-East Asia. ........................... 111
Figure 4.6: Contagion Test for S&P 500 and Stock Markets in the Region ......................... 124
Figure 4.7: Contagion Test for Oil Prices and Stock Markets in the Region ........................ 126
Figure 4.8: Contagion Test for BSI and Stock Markets in the Region ................................. 127

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List of Abbreviations

ABX Asset-backed security index
ADB Asian Development Bank
ADF Augmented Dickey-Fuller
AFTA ASEAN free trade agreement
AIG American International Group
AMC Asset management company
APRA Australian Prudential Regulatory Authority
APT Arbitrage pricing theory
ARCH Autoregressive Conditional Heteroscedasticity
ASEAN Association of South-East Asian Nations
BOT Bank of Thailand
BP British Petroleum
BSI Business sentiment index
CAPM Capital asset-pricing model
CDO Collateralised debt obligations
CDS Credit default swaps
CEA Chinese economic area
CEE Central and Eastern European
DCC Dynamic Conditional Correlation
DJIA Dow Jones Industrial Average
ECM Error correction model
EGARCH Exponential Generalized Autoregressive Conditional Heteroscedasticity
EMU Economic and Monetary Union
EU European Union
FDI Foreign direct investment
FINSIA Financial Service Institute Australasia
GARCH Generalised Autoregressive Conditional Heteroscedasticity
GCC Gulf Cooperation Council
GDP Gross domestic product
ICSS Iterated Cumulative Sums of Squares
IGARCH Integrated Generalised Autoregressive Conditional Heteroscedasticity
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IKB Industrie Kredit Bank
IMF International Monetary Fund
JKSE Jakarta Stock Exchange (Indonesia)
KLSE Kula Lumpur Stock Exchange (Malaysia)
KPSS Kwiatkowski, Phillips, Schmidt and Shin
LM Lagrange multiplier
MA Moving average
MBS Mortgage-backed securities
MENA Middle East and North Africa
MGARCH Multivariate Generalised Autoregressive Conditional Heteroscedasticity
MNC Multi-national corporations
MSCI Morgan Stanley Capital International
NASDAQ National Association of Securities Dealers Automatic Quotation
NPL Non-performing loans
NYSE New York Stock Exchange
OECD Organisation for Economic Co-operation and Development
OLS Ordinary least square
OPEC Organisation of Petroleum Exporting Countries
PAD People’s Alliance for Democracy
PP Phillips-Perron
PPP People’s Power Party
PRC People’s Republic of China
PSE Philippine Stock Exchange (Philippine)
PTP Pheu Thai Party
RBSI Returns of business sentiment of Thailand index
RJKSE Return of the Jakarta Stock Exchange
RKLSE Return of the Kula Lumpur Stock Exchange
ROIL Return of the crude oil price
RPSE Return of the Philippines Stock Exchange
RSET Return of the Stock Exchange of Thailand
RSGX Return of the Stock Exchange of Singapore
RS&P 500 Return of the Standard & Poor’s 500
S&P 500 Standard & Poor’s 500
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