Stock Returns and Macroeconomic Influences: Evidence from the Six

Asian-Pacific Countries

Wan Mansor Wan Mahmood, Ph.D* and Nazihah Mohd Dinniah

Financial Economics, and Futures Market Research Group
Universiti Teknologi MARA Terengganu
23000 Dungun, Terengganu, MALAYSIA
Tel: 6098403774
Fax: 6098403777
Email: dwanmans@tganu.uitm.edu.my

________________________________

* Correspondent author

Keywords: Stock market; economic variables; cointegration; Asian-Pacific countries

JEL E31, G12

_____________________________________________________________

Electronic copy available at: http://ssrn.com/abstract=995108

 Stock Returns and Macroeconomic Influences: Evidence from the Six
Asian-Pacific Countries

ABSTRACT

We examine the dynamics relationship between stock prices and economic variables in
six Asian-Pacific selected countries of Malaysia, Korea, Thailand, Hong Kong, Japan,
and Australia. The monthly data on stock price indices, foreign exchange rates, consumer
price index and industrial production index that spans from January 1993 to December
2002 are used. In particular, we focus our analysis on the long run equilibrium and short
run multivariate causality between these variables. The results indicate the existing of a
long run equilibrium relationship between and among variables in only four countries,
i.e., Japan, Korea, Hong Kong and Australia. As for short run relationship, all countries
except for Hong Kong and Thailand show some interactions. The Hong Kong shows
relationship only between exchange rate and stock price while the Thailand reports
significant interaction only between output and stock prices. An accurate estimation of
the relationship between the economic variables and stock market behaviour enables the
investors - both local and foreign to make effective investment decisions. At the same
time, for the policy makers, a precise prediction of this type of relationship may help
government agencies in designing policies to encourage more capital inflows into the
respective countries’ capital market.

Electronic copy available at: http://ssrn.com/abstract=995108

 Stock Returns and Macroeconomic Influences: Evidence from the Six
Asian-Pacific Countries

1. Introduction

For number of years, there has been an extensive debate in the literature assessing the

influence of macroeconomics variables on the stock return (see Chen, Roll and Ross

1986; Poon and Taylor 1991; Clare and Thomas 1994). The economic theory, in

explaining this interrelationship, suggests that stock prices should reflect expectations

about futures corporate performance. Corporate profits on the other hand generally may

reflect the level of country’s economic activities. Thus, if stock prices accurately reflect

the underlying fundamentals, then the stock prices should be employed as leading

indicators of future economic activity. However, if economic activities reflect the

movement of stock prices, the results then should be the opposite, i.e. economic activities

should lead stock price. Therefore, the causal relations and dynamics interactions among

economics factors and stock prices are important in the formulation of nation’s

macroeconomic policy.

According to Oberuc (2004), the economic factors which, usually associated with stock

prices movement and being considered greatly by researchers are dividend yield,

industrial production, interest rate, term spread, default spread, inflation, exchange rates,

money supply, GNP or GDP and previous stock returns, among others.

3
In the financial literature, much of the previous studies have pointed out that stock prices,

real economic activity, and consumer price levels indicate strong long run equilibrium

relationships (see Adrangi, Chatrath and Raffiee, 1999; Adrangi, Chatrath and

Sanvicente, 2000). However, Hondroyiannis and Papapetrou (2001) results show the

opposite. They find that there is no long-run relationship among these economic variables

during the period study in the Greece stock market. As for relationship between stock

returns and inflation per se, many find evidence that stock returns are negatively affected

by both expected and unexpected inflation particularly in US (see Lintner 1975; Fama

and Schwert 1977; Fama 1981, 1982; Geske and Roll (1983). Fama (1981), for instant,

offer an explanation for the negative relationship between stock returns and inflation

through a hypothesized chain based on the money and the quantity theory of money.

Besides that, numerous studies examine the causal relation between stock return and

exchange rates across countries. For example, Ajayi and Mougoue (1996) shows that

there is a long-run relationship where increase in stock prices have a positive effect on

domestic currency value. However, Yu (1996) results, based on the Granger causality

test, show that the changes in stock prices are caused by changes in exchange rates only

in the Tokyo market and the Hong Kong market. However, no such causation is found for

the Singapore market.

The present paper deals with linkages among the stock prices and three economic factors,

namely, inflation rates, industrial production output, and foreign exchange rates. The

4
event surrounding the Asian financial crisis in 1997 generates an intensive argument

about the relevancy of these variables in determining the economics growth over the

affected countries in the Asian Pacific region. The behaviour of the financial economics

for examples produced negative shock in the real economy resulting in negative gross

domestic product (GDP) growth rate for countries like Korea, Malaysia and Thailand

throughout the period from 1997 through 1998.

The selection of countries such as Malaysia, Korea, Thailand and Hong Kong is based on

two reasons. First they are categorised as emerging market and secondly, with an

exception of Hong Kong, these countries are badly affected during the Asian financial

crisis. During the period of study, their economic condition is in chaos. Their stock

indices, consumer price index and the industrial production index are very volatile. For

example, the equity markets of Malaysia and Thailand have loss about 60 percent of its

market value during the crisis, while the stock indices in Malaysia, Korea and Thailand

have decreased of about fifty percent from about 1200, 1000, 1600 in 1994 to about 500,

400 and 300 in 1998, respectively. Inflation, a real treat in most emerging markets, seems

to have fallen in Malaysia and Thailand but risen in Korea during the period while the

industrial production index have soared dramatically in Korea but have fallen in

Thailand. In 1997-1998, the output of the real economy of Malaysia declined plunging

the country into its first recession for many years. Furthermore, the economy of these

countries in mid and late 1997 demonstrated huge currency depreciation and has

threatened the stability of financial structure. The Hong Kong economy also encountered

5
critical hardships, including accelerated economic downturn, a rise in unemployment, an

increase in the fiscal deficit and a delayed recovery.

The inclusion of Japan in the sample, the only country in Asia region categorized as

industrialized country, is due to the fact that it is also affected during the Asian financial

crisis. Its GDP real growth rate slowed down dramatically in 1997, from 5 % to 1.6 %

and even sank into recession in 1998. While, Australia inclusion is mainly due to the

integration of its economy into the rapidly growing Asia-Pacific region and increasing

emphasis on using the Asia-Pacific Economic Cooperation (APEC) forum to advance

regional economic liberalization. In addition, Australia introduces economic reforms

during 1990s to boost economic diversification, export orientation, and the manufacturing

industries and has become one of the OECD's (Organisation for Economic Co-operation

and Development) fastest-growing economies.

The present study contributes to the literature in three ways. First, the findings of this

investigation should enable the investors and portfolio managers- both local and foreign

to make effective investment decisions. At the same time, for the policy makers, a precise

prediction of this type of relationship may help the government agencies in designing

policies to encourage more capital inflows into their capital market. The emerging of fast

growing markets such as Malaysia and Thailand, for example, has contributes

tremendous growth impact on the regional economy for the last fifteen years in addition

to new industrialized countries such as the Korea and Hong Kong and to certain extend

the developed market of Japan and Australia. Secondly, the present study will also shed

6
some light in that it provides better understanding on the depth of the stock market

activities especially in emerging market apart of being able to identify and relate the

changes in economic factors with the changes in stock market movements. Therefore, this

study highlights the differences in the causal relationship of stock returns and economic

activities across emerging market, new industrialized countries and developed markets.

Finally, the study uses the cointegration framework of Johansen (1988) in testing for

multivariate long run cointegration relationships. Additionally, the short run relationship

is tested since as Darrat (1999) argues, most of higher levels of financial development

could be realized in the short-run while in the long run as economy expand and become

mature these effects slowly disappear. Thus, testing only for the long run interaction

might lead to the wrong conclusion. In this regard, the error correction model (ECM)

multivariate is more appropriate since it specifies and estimates short run and long run

relationship in single equation compared to the traditional univariate regression.

The remainder of this paper is organised as follows. In Section 2, we provide the data and

empirical model. Section 3 presents the results. Finally, in Section 4 is our summary and

conclusions.

2. Data and Empirical Models

In this study, the data on stock price index, inflation rate, industrial production index and

foreign exchange rates for six countries are employed. The stock indices are expressed as

7
an index number, inflation rate is measures using the consumer price index, the output

uses Industrial Production Index (IPI) except for Australia where the Producer Price

Index (PPI) are used to measure the output level of the country’s economic. The

industrial production index specifically measures the monthly level of the physical output

of the manufacturing, mining, and gas and electric utility industries, whereas the producer

price index is a general-purpose index used to measure the average rate of change in price

changes, caused by domestic procedures of commodities or product. Foreign exchange

rate is measured using direct quotation based on one unit of U.S dollar for units of

Malaysian ringgit, Japanese yen, Korean won, Thai baht, Hong Kong dollar and indirect

quotation basis for Australian dollar. Data are drawn from Datastream database and

various issues of Quarterly Bulletin and Economics and Financial Statistics, published by

Central Banks of the selected countries and are available at the Bank Negara Malaysia’s

Knowledge Management Centre over the period January 1993 through December 2002.

The monthly data for Malaysia, Thailand, Korea and Japan are used except for Hong

Kong and Australia where the data are available only for quarterly basis. The countries

selection criteria are driven by the requirement of having continuous data records over

the sample period. All the data are changed into natural logarithmic.

To examine the long-run equilibrium relationship among stock indexes, consumer price

index, industrial production index and foreign exchange in each 6 countries, the study

employs cointegration tests. Cointegration refers to the possibility that non-stationary

variables may have a linear combination that is stationary. Such a linear combination, the

8
cointegrating vector, implies that there is a long-run equilibrium relationship among

variables, i.e., variables will not wander off apart from one another over extended periods

of time. Therefore, cointegration among the variables implies a long-run relationship.

In this regard, two cointegration tests of Engle and Granger (1987) and Johansen and

Juselius (1990) are performed. Engle and Granger test for long-run equilibrium relation

between two or more stationary variables. Consider dependent variable of stock returns

measure by composite index, S, and three independent variables. They are consumer

price index, C t , industrial production index, I t and foreign exchange, F t , used in the

present study are said to be cointegrated if their difference ε t = S t − (C t + I t + Ft ) is I(0).

The ε t is the equilibrium error term and can be estimated from the cointegration equation

as follows:

S t = α + βC t + δI + γF + ε t (1)

To test for integration between the variables, the study applies the ADF test procedures to

the residual series, ε t obtained from equation (1). The null hypothesis of cointegration is

rejected when the t-statistic is negative and greater in absolute value than the critical

value reported in Engle and Yoo (1987).

The Johansen and Juselius estimation method is based on the error-correction

representation of the VAR(p) model with Gaussian errors. It is base on a multivariate

9
generalization of the methodology suggested by Engle and Granger (1987). The test for

the non-zero eigenvalues is normally conducted using the following two test statistics:

n
λtrace(r ) = −T ∑ ln(1 − λ )
i = r +t
i (2)

λ max(r ) = −T ln(1 − λr +1 ) (3)

where λi are the estimated eigenvalues, and T is the number of valid observations. In

equation (4), λ trace test the null hypothesis that the number of distinct cointegrating

vectors is less than or equal to r against a general alternative. In equation (5) λ max

statistic test the null hypothesis or r cointegrating relationships against the alternative of

r+1 cointegrating relations. The critical values of λ max and λ trace are discussed in

Johansen and Juselius (1990) and Osterwal-Lenum (1992).

If the time series are deemed to be cointegrated, i.e at least one cointegrating vector

among the variables, we can assure that causality exists in at least one direction. It can

therefore estimate each parameter, in the error correction model (ECM) as follows:

m n p q
∆Yitt = α + ∑∆Yt − 1 + ∑∆Xt − 1 + ∑∆Zt − 1 + ∑∆Wt − 1 + δ1lt −1 + ε1,t (4)
i =1 i =1 i =1 i =1

where ∆Yi , t is stock price index of country i and month/quarter t . ∆Yi , t is lagged stock

index, ∆X i , t is the inflation rate, ∆Z i , t is the industrial production index, ∆Wi ,t is the

10
foreign exchange rates, l t −1 is the error correction term lagged one and ε 1, t is the

residual. The ECM allows us to differentiate between the short-and long dynamic

relations. The l t −1 measures the deviations of the series from the long-run equilibrium

relation. This deviation affects the short-run behaviour of ∆Yi , t , with the error correction

coefficients, δ1 describing how quickly the economic variables respond to the deviation.

In order to construct ECM, lag lengths, m, n, p and q must be selected. A frequently

applied approach is Akaike’s (1974) final prediction error (FPE) criterion as suggested by

Hsiao (1981).

3. Empirical Results

The time series properties of dependent and independent variables are first examined.

Table 1 shows the summary statistic for stock index, exchange rates, inflations rate and

industrial output. The table consists of maximum, minimum, mean, standard deviation,

skewness and kurtosis.

Table 1 Summary Statistics for the Return Series

COUNTRY N Variables Mean Std Dev Skewness Kurtosis - 3

Stock price index .2863E-3 .094873 .13653 1.1920

MALAYSIA 120 Exchanges rate .0026346 .028674 -.23179 14.6236

Inflation rate -.6113E-3 0.022597 -7.4332 54.9849
Industrial Output .0015614 0.067940 -4.1929 32.0626

Stock price index -.0057111 0.061724 0.087125 -0.23384

JAPAN 120 Exchanges rate -.4066E-3 0.036324 -0.90821 3.0472

11
 Inflation rate .1109E-3 0.0036119 1.4623 6.3359
Industrial Output .9248E-3 .087125 0.044472 32.5542
Stock price index -.5524E-3 0.10320 0.48555 1.8339

KOREA 120 Exchanges rate .0033391 0.045340 3.0604 23.1913

Inflation rate .0034020 0.0052770 1.0456 2.9460
Industrial Output .0070306 0.059439 0.53731 1.1616
Stock price index -.0083798 1.0110 -0.15459 52.0861

THAILAND 120 Exchanges rate -.0043492 0.40899 0.73948 11.9516

Inflation rate -.0018532 0.075537 -0.44019 39.1749
Industrial Output -0.003337 0.082716 -4.6260 34.2391
Stock price index 0.0094434 0.15705 0.0028199 0.67299

HONG KONG 40 Exchanges rate .2169E-3 0.8341E-3 .20859 -0.51056

Inflation rate .0051418 0.017375 -1.2244 2.8466
Industrial Output -.0047533 0.12495 -0.60765 -0.92207

Stock price index 41.5317 263.6640 6.0849 35.0256

AUSTRALIA Exchanges rate 1042.8 1121.9 .16164 -1.8941

40
Inflation rate 5.4453 16.8967 5.9497 33.9620
Industrial Output 60.1095 56.1632 .0097580 -1.9872

Notes: N is the number of samples.

Table 2 reports the ADF test statistics for the presence of unit root of the level and first

difference over the sample period. For the level series, the results show the existence of

unit root for all variables as it fails to reject the null hypothesis of nonstationary for all

countries with an exception of industrial output for the Japan, and stock index and

inflation for the Thailand. Japan’s industrial production index (IPI) and the Thailand’s

stock price and consumer price index (CPI) t-statistic results are higher than the critical

value of 2.8859. After first difference, the ADF test of unit root indicates that all

12
variables employed for all countries are stationary and would not cause spurious

regression outcomes.

Table 2. Unit Root Tests on Level and First Differences

ADF Statistic
COUNTRY VARIABLES Level First Differences
Stock Price -1.8248 -11.4916*
MALAYSIA Forex -1.1635 -11.4916*
Inflation -1.9195 -9.4868*
Industrial Output -1.2736 -7.68658*
Stock Price -.81319 -8.1293*
JAPAN Forex -1.8853 -6.7113*
Inflation -2.6197 -9.9406*
Indutrial Output -7.935* -19.0020*
Stock Price -2.3626 -7.6944*
KOREA Forex -1.6234 -6.6782*
Inflation -1.0090 -8.0116*
Indutrial Output -1.1113 -10.2777*
Stock Price -7.6950* -11.4916*
THAILAND Forex -1.2619 -11.4916*
Inflation -3.1399 * -9.4868*
Indutrial Output -1.2455 -7.6865*
Stock Price -2.1847 -4.0789*
HONG KONG Forex .096395 -5.7541*
Inflation -2.6732 -2.9022*
Indutrial Output -2.5608 -9.4329*
Stock Price -1.6311 -4.6434*
AUSTRALIA Forex -.80231 -6.2182*
Inflation -.74443 -4.8066*
Indutrial Output .049638 -5.2167*

13
Notes: 95% critical value for the Malaysia, Japan, Korea & Thailand for augmented Dickey-Fuller (ADF)
statistic is 2.8859 and for Hong Kong & Australia is 2.9400.

Table 3 presents the Engle-Granger cointegration results following the test on the

residuals from the cointegrating regression in equation 1. The hypothesis of no

integration is rejected for all countries except for the Malaysia and the Australia since the

t-statistics are greater than the critical value in absolute terms. The Thailand stock return

cointegrated with foreign exchange and inflation. The Japanese the stock return

cointegrated with inflation and industrial output. For the Korea, the stock returns

cointegrate with foreign exchange while the Hong Kong stock return correlate with

inflation.

Table 3 Engle-Granger Cointegration Test Results

Residuals t-test
COUNTRY Dependent Independent ADF Statistic
Forex -2.0012
MALAYSIA Stock Price Inflation -2.3811
Industrial Output -2.2621
Forex -1.5950
JAPAN Stock Price Inflation -3.0481*
Industrial Output -6.6740*
Forex -7.1648*
KOREA Stock Price Inflation -1.3047
Industrial Output 2.0034
Forex -3.6796*
THAILAND Stock Price Inflation -5.2316*
Industrial Output -2.7793
Forex -2.8910
HONG KONG Stock Price Inflation -3.7541*
Industrial Output -2.6728
Forex -1.6457
AUSTRALIA Stock Price Inflation -1.5823
Industrial Output -1.6775

14
Notes: 95% critical value for the Malaysia, Japan, Korea & Thailand for augmented Dickey-Fuller (ADF)
statistic is 2.8859 and for Hong Kong & Australia is 2.9400. The ADF regressions include an intercept but
not a trend.

Table 4 reports multivariate cointegration test results based on Johansen and Juselius

cointegration model. The max test statistic (eigenvalues) and the trace test statistic of null

hypothesis of no long-run relationship among variables, i.e r = 0 cannot be rejected only

for Malaysia and Thailand at the 5% significant level. Other countries report at least one

cointegrating vectors with Hong Kong and Australia show at least three or fewer

cointegrating vectors in the system, indicating a long-run relationship among variables.

The Engle-Granger tests indicate cointegration in four out of six models which include

Japan, Thailand, Korea and Hong Kong. The Johansen’s cointegration test results on the

other hand also suggest four cointegration but with the inclusion of Australian and

exclusion of Thailand from the list. Malaysia remains the only country which, indicate no

integration either using Engle-Granger or Johansen and Juselius models.

Table 4 Multivaiate Johansen Cointegration Test Results

MAXIMAL TRACE
COUNTRY EIGENVALUE
Statistic 95% critical Statistic 95% critical
value value
MALAYSIA
r=0 20.2907 (28.2700) 38.0201 (53.4800)
r<= 1 10.2449 (22.0400) 17.7294 (34.8700)
r<= 2 5.1489 (15.8700) 7.4845 (20.1800)
r<= 3 2.3356 (9.1600) 2.3356 (9.1600)

15
 JAPAN
r=0 47.2980 (28.2700)* 78.7466 (53.4800)*
r<= 1 23.8131 (22.0400)* 31.4486 (34.8700)
r<= 2 5.5729 (15.8700) 7.6354 (20.1800)
r<= 3 2.0625 (9.1600) 2.0625 (9.1600)
KOREA
r=0 64.8790 (28.2700)* 94.8466 (53.4800)*
r<= 1 15.3896 (22.0400) 29.9676 (34.8700)
r<= 2 10.0730 (15.8700) 14.5780 (20.1800)
r<= 3 4.5050 (9.1600) 4.5050 (9.1600)
THAILAND
r=0 20.2907 (28.2700) 38.0201 (53.4800)
r<= 1 10.2449 (22.0400) 17.7294 (34.8700)
r<= 2 5.1489 (15.8700) 7.4845 (20.1800)
r<= 3 2.3356 (9.1600) 2.3356 (9.1600)
HONGKONG
r=0 74.6894 (28.2700)* 126.8144 (53.4800)*
r<= 1 30.8556 (22.0400)* 52.1250 (34.8700)*
r<= 2 13.1851 (15.8700) 21.2694 (20.1800)*
r<= 3 8.0842 (9.1600) 8.0842 (9.1600)
AUSTRALIA
r=0 117.2744 (28.2700)* 166.2720 (53.4800)*
r<= 1 25.5748 (22.0400)* 48.9976 (34.8700)*
r<= 2 16.5856 (15.8700)* 23.4228 (20.1800)*
r<= 3 6.8372 (9.1600) 6.8372 (9.1600)
Notes: significant at 5% level. The r denotes the maximum number of cointegrating vectors. I(1) for
Malaysia, Japan, Korea, Thailand, Hong Kong and Australia

Given the cointegration results, we then construct the ECM which is useful in identifying

the short run interaction among the variables and to ascertain the impact of each

economic variable on stock returns. The results from the error correction model (ECM)

test for the short-run equilibrium relationship between stock price and the

macroeconomic variables are reported in Table 5. The endogenous variables in the

system include lagged economic variables and the lagged one of error correction term

(residuals), and their joint significance is provided by the F-statistics. If the coefficients

are significant, it implied that the lagged economic variables are important in predicting

16
current movement of the dependent variable (stock return) and the dependent variable

adjust to the previous equilibrium error. Several observations can be found in Table 5.

First, in general, there is no such relationship between the stock price and the

macroeconomics variables in the short-run period for all countries except in for Thailand

and Hong Kong. As for Thailand, the result shows evidence of short-run relationship

running from production output to stock price. Indeed, with a one percentage point

increase in the real output, there should be a 17 percent increase in the stock returns. With

computed F-value of 8.66 for the OLS regression, one must reject the null hypothesis that

the coefficients for ∆X 2 ∆X 3 ∆X 4 , are jointly equal to zero. For the Hong Kong market,

the exchange rate has significant t-statistic on the stock returns. A one percent increase in

exchange rate (weaker HK dollar against US dollar) is expected to reduce the stock return

by seven percent.

Taken overall, the above findings stand in an agreement with the earlier studies which

documented significant long run interaction between inflation rates, exchange rates and

real output with stock returns of emerging economics, as well developed economics.

However, the results for short run relationship between variables are mixed compared

with the earlier studies. The findings of insignificant impact of inflation rate on stock

returns stand in sharp contrast to the previous studies like Fama 1981, and Geske and

Roll (1983). On the other hand, using macroeconomics variable such as foreign exchange

rate, our study finds similar results to those of Yu (1996)

17
 Table 5 Estimates of the Error Correction Model (ECM) – Multivariate

Countries Variables
Dep. Indep.
Constant
α
Residual
εt ∑ ∆X 1 ∑ ∆X 2 ∑ ∆X 3 ∑ ∆X 4
F statistic
(t-statistic) (t-statistic) (t-statistic) (t-statistic)

X1 X2, X3, X4 -.2420E-3 -.2906E-4 .10926 .076177 -.051477 -.42748 0.62240

MALAYSIA
(-.027111) (-.42113) (1.1615) [1] (.24493)[2] (-.39336)[1] (-1.0917)[1] (.683)

-.0054149 .8826E-6 .017480 -.11908 -.16726 .013988 0.14038

JAPAN
(-.90247) .20808 (.18015) [1] (-.71738) [1] (-.099257) [2] (.20188) [2] (.982)

-.0049724 .1956E-3 -.042674 -.24811 1.5007 .23363 0.83799

KOREA
(-.40517) (.51187) (-.42933) [2] (-1.0111) [3] (.73587) [1] (1.4003) [1] (.525)

-.0060339 .1956E-3 -.49256 -1.1903 -.21731 .17494 8.6618

(-.071965) (.51187) (-6.0320)* [1] (-.65755) [1] (.19909) [1] (1.6852)* [3] (.000)*
THAILAND
.017698 -.1327E-4 -.069260 -.070144 .84437 -.27452 1.2209
(.60572) (-.53702) (-.40384) [1] (-2.0820)* [3] (.54634) [3] (-1.1953) [3] (.323)
HONGKONG
.022372 .2190E-3 -.034758 -.15754 -.53700 .14761 0.29606
(1.4856) (.84152) (-.20589) [1] (-.83700) [1] (-.37338) [1] (.14475) [3] (.911)
AUSTRALIA

Notes: * Significant at 5% level. X1= Stock price, X2= Exchange rate, X3=Inflation rate, X4=Output. T-statistic is in the parenthesis and the lag order is
in the bracket

18
4. Summary and Conclusions

There is extensive empirical work in the literature concerning the interaction between

stock returns and economic factors. This paper focuses the relationship between stock

price and three macroeconomics variables which consist of inflation, output and

exchange rates of six countries in Asian-Pacific region. In particular, the cointegration

hypothesis between variables are tested. The analysis is performed employing monthly

data for Malaysia, Thailand, Korea and Japan, and quarterly data for Hong Kong and

Australia. The Engle Granger test and Johansen and Juselius maximum likehood

procedure are used to explain the long-run equilibrium relationship between the stock

price and the economic variables. The study provides evidence of long-run relationship

between these variables in all countries, thus support the cointegration hypothesis with

exception for Malaysia.

The Error Correction Model (ECM) used to investigate the short-run relationship

between the stock price and other variables is employed. The results show that there is no

cointegration in the short-run relation between all variables in all selected countries

except between foreign exchange rates with stock price in Hong Kong, and between real

output and stock price in Thailand.

One notable implication of our dynamic analysis for investors and policy makers, in

general, are clear in that the findings are not country-specific. The macroeconomic

factors employ seems to produce a near to negligible impact on the performance of stock

19
market returns in any country under investigations whether they are categorised as

emerging market, new industrialized countries and developed markets with an exception

for Thailand and Hong Kong.

REFERENCES

Adrangi, B., A. Chatrath, and K. Raffiee 1999, Inflation, Output and Stock Price:
Evidence from Two Major Emerging Markets, Journal of Economics and Finance,
23, pp. 266-278.

Adrangi, B., A. Chatrath, and A. Z. Sanvicente 2000, Inflation, Output and Stock Price:
Evidence from Brazil, Working Paper, University of Portland.

Ajayi, R. A., and M. Mougoue 1996, On the Dynamic Relation between Stock Prices and
Exchange Rates, Journal of Financial Research, 19, pp.193-207.

Akaike, H. 1974, A new look at the statistical model identification, IEEE Transactions on
Automatic Control, pp. 714-723

Chatrath, A., S. Ramchander, and F. Song (1997), ‘Stock Prices, Inflation and Output:
Evidence from India’, Journal of Applied Financial Economics, 7, pp. 439-445.

Chen, N. F., R. Roll, and S. Ross, 1986, Economic Forces and the Stock Market, Journal
of Business, 59, pp. 383-403.

Clare, A. D., and S. H. Thomas, 1994, Macroeconomics Factors, the APT and the UK
Stock-Market, Journal of Business Finance and Accounting, 21, pp. 309-330.

Dickey, D. A., and W. A. Fuller, 1979, Distributions of The Estimators for

Autoregressive Time Series with a Unit Root, Journal of the American Statistical
Association, 74, pp. 427-31.

Engle, R. F., and C. W. J. Granger, 1987, Cointegration and Error Correction:

Representation Estimation and Testing, Econometrica, 55, pp. 251-276.

Engle, R. F. and B. S. Yoo, 1987, Forecasting and testing in cointegration systems,

Econometrics, 35, pp.143-159

Fama, E. F. 1981, Stock Returns, Real Activity, Inflation and Money, American
Economic Review, 71, pp. 545-565

20
Fama, E. F. 1982, Inflation, Output and Money, Journal of Business, 55, pp. 201-31

Fama, E. F., and G. W. Schwert 1977, Asset Returns and Inflation, Journal of Financial
Economics, 5, pp.115-146

Geske, R., and R. Roll 1983, The Monetary and Fiscal Linkage between Stock Returns
and Inflation, Journal of Finance, 38, pp.1-33.

Hondroyiannis, G., and E. Papapetrou 2001, Macroeconomic Influences on the Stock

Market, Journal of Economics and Finance, 25, pp. 33-49.

Hsiao, C. 1981, Autogressive Modelling and Money-Income Causality Detection,

Journal of Monetary Economics, January, pp. 85-106.

Johansen, S. 1988, Statistical Analysis of Cointegration Vectors, Journal of Economic

Dynamics and Control, 12, pp. 231-254

Johansen, S. 1991, Estimation and Hypothesis Testing of Cointegration Vectors in

Gaussian Autoregressive Models, Econometrica, 59, pp. 15551-1580

Johansen, S., and K. Juselius 1990, Maximum Likehood Estimation and Inference on
Cointegration – With Applications to the Demand of Money, Oxford Bulletin of
Economics and Statistics, 52, pp. 169-210

Lintner, J. 1975, Inflation and Security Returns, Journal of Finance, 30, pp. 259-280

Oberuc, R. E. 2004, Dynamic Portfolio Theory and Management: Using Active Asset
Allocation to Improve Profits and Reduce Risk, Mc-Graw Hills, U.S.

Osterwald-Lenum, M. 1992, A Note with Quantiles of the Asymptotic Distribution of

the Maximum Likelihood Cointegration Rank Test Statistics, Oxford Bulletin of
Economics and Statistics, 50, pp. 361-377.

Poon, S., and S. J. Taylor 1991, Macroeconomic Factors and the U.K. Stock Market,
Journal of Business Finance and Accounting, 18, pp. 619-636.

Yu, Q. 1996, Stock Prices and Exchange Rates: Experience in Leading East Asian
Financial Centres - Tokyo, Hong Kong and Singapore, Singapore Economic Review,
41, pp. 47-56.

21