Current Issue

Capital Markets Review Vol. 27, No. 1, pp. 1-18 (2019)

Financial Openness and Trade Openness Nexus: Empirical Evidence from Global Data

Xiao-Jun Goh1, Wen-Qi Tong1 & Tuck-Cheong Tang1
1Faculty of Economics and Administration, University of Malaya, Malaysia.

Abstract: Over the past decades of globalization, most of the countries in the world is eventually opening up their financial markets which is believed to be an engine in fostering economic growth and development. Perhaps, it is not an exemption for their real market (goods and services), in particular market integration with other countries via trade liberalization. Indeed, the ‘interconnectedness’ between these two markets remains unclear from the empiric perspective. The objective of this study is to offer a fresh empirical evidence of financial openness and trade openness nexus. Both de jure (KAOPEN) and de facto (foreign direct investment inflow, FDII and outflow, FDIO) of financial openness are employed to link with trade openness (ratio of total trade, exports and imports to GDP) with an unbalanced panel data of 115 countries spanning between 1970 and 2014. The results of Granger non-causality tests show a two-way causality between de facto financial openness (FDII and FDIO) and trade openness, but it is not the case for de jure measure, in general (full panel data). Also, a two-way causality is observed for high, upper-middle, and low income groups, except for lower-middle income group, in which trade openness causes financial openness. This study does also support the interdependent hypothesis between real sector and financial sector, and this insight has important policy implication.

 

Capital Markets Review Vol. 27, No. 1, pp. 19-33 (2019)

Asymmetric Effects of Exchange Rates on Stock Prices in G7 Countries

Arash Habibi& Chin Lee1
1Jönköping International Business School, Jönköping University, Sweden.
2Faculty of Economics and Management, Universiti Putra Malaysia, Malaysia.

Abstract: This paper examines whether there are asymmetric effects of exchange rates on stock prices in G7 countries. According to Fratzscher (2008), the G7 has been overall effective in moving the US dollar, yen and euro in the intended direction at horizons of up to three months after G7 meetings. Therefore, it is important to find out the impacts of G7 exchange rate adjustments on the stock markets. These effects can become worldwide as G7 stock markets have been the trading platform for international market capitalization for about last thirty years. A vast body of research documented that a country’s currency can have a large effect on stock market movement, however the empirical findings are mixed. This study contended that exchange rates can affect stock prices asymmetrically. This study systematically discussed four views on how exchange rates can affect stock prices asymmetrically. A dataset consists of 227 monthly data from 31-12-1997 to 31-10-2016 for G7 countries, namely Canada, France, Germany, Italy, Japan, the United Kingdom and the United States are collected from Thomson Reuters DataStream and Bank for International Settlements (BIS). A nonlinear ARDL model is employed to analyze the asymmetric effects of exchange rates on stock prices. The findings showed that the exchange rate changes in all G7 countries have short-run asymmetric effects on stock prices. However, the results do not hold into the long-run, except for Germany. This paper suggests that policymakers should have a different reaction in policy decision between the depreciation and appreciation of exchange rates. Investors can make profit from stock market by buying or selling stocks according to the predicted response of stock market to exchange rate changes. Take into consideration of the importance of G7 currencies and stock markets, this paper examined and compared the asymmetric effects of exchange rates on stock prices in G7 countries.

 

Capital Markets Review Vol. 27, No. 1, pp. 34-52 (2019)

The Malaysian Domestic Bond Market: Growing into its Rightful Role

Meng-Wai Lee1 , Kim-Leng Goh1  & Michael Meow-Chung Yap2
1Faculty of Economics and Administration, University of Malaya, Malaysia.
2Business School, University of Nottingham, Malaysia.

Abstract: This paper revisits Malaysia’s past for a closer look into the interaction between its dominant banking sector and capital markets, encompassing both domestic bond and equity markets. Data beginning Q4, 1993 on the Malaysian domestic bond market are extracted from Bank for International Settlements (BIS). The sample period ends at Q4, 2011 due to a change in definition for categories of domestic debt securities by BIS. Nine possible determinants of bond market development are identified from the empirical literature. The ARDL modelling approach is used. In the absence of a long-run relationship, the analysis continues with an OLS distributed lag regression. Findings point to competition between the domestic bond market with the established banking sector and equity market, which could have hindered development of the bond market in its earlier years. Since interest rate volatility and exchange rate changes adversely impacted bond market development, credible monetary policy is necessary to support development of the Malaysian bond market. The benefits accruing from a better developed domestic bond market for raising long-term funds and providing financing for post-crisis recoveries can be seen in Malaysia’s example as a policy lesson for other emerging economies.

 

 

Updated on 24 September 2019 by S.F. Chuah