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What drives stock markets over short horizons? Evidence from emerging markets

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  • Paresh Kumar Narayan

Abstract

The goal of this paper is to examine the importance of permanent and transitory shocks in explaining variations in stock prices for Singapore, Taiwan, and South Korea using a trend-cycle decomposition technique. This study is novel in that in measuring the impact of shocks we not only impose common trend restrictions but also common cycle restrictions. We later undertake a post-sample forecasting exercise to confirm the efficiency gains from imposing common cycle restrictions. We find that over short horizons, transitory shocks are the dominant source of variations in stock prices for South Korea, while permanent shocks explain the bulk of the variations in stock price of Singapore and Taiwan.

Suggested Citation

  • Paresh Kumar Narayan, 2011. "What drives stock markets over short horizons? Evidence from emerging markets," Quantitative Finance, Taylor & Francis Journals, vol. 11(2), pages 261-269.
    • Handle: RePEc:taf:quantf:v:11:y:2011:i:2:p:261-269
    DOI: 10.1080/14697680903460127
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    Cited by:

    1. K. Hafsal & S. Raja Sethu Durai, 2023. "Fundamental and bubble spillovers in stock markets: a common trend approach," SN Business & Economics, Springer, vol. 3(3), pages 1-17, March.
    2. Balcilar, Mehmet & Gupta, Rangan & Wohar, Mark E., 2017. "Common cycles and common trends in the stock and oil markets: Evidence from more than 150years of data," Energy Economics, Elsevier, vol. 61(C), pages 72-86.
    3. Haddad, Hedi Ben & Mezghani, Imed & Al Dohaiman, Mohammed, 2020. "Common shocks, common transmission mechanisms and time-varying connectedness among Dow Jones Islamic stock market indices and global risk factors," Economic Systems, Elsevier, vol. 44(2).

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