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

Author

Listed:
  • Sei-Wan Kim

    (Department of Economics, Ewha Woman's University)

  • Moon Jung Choi

    (Economic Research Institute, The 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.

Suggested Citation

  • Sei-Wan Kim & Moon Jung Choi, 2016. "Does Intra-Regional Trade Matter in Regional Stock Markets?: New Evidence from Asia-Pacific Region," Working Papers 2016-11, Economic Research Institute, Bank of Korea.
    • Handle: RePEc:bok:wpaper:1611
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    More about this item

    Keywords

    Stock market synchronization; Regional trade; Regime change; Smooth transition autoregressive model;
    All these keywords.

    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • C40 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - General
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation

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