ASEAN-5 COUNTRIES STOCK MARKET INTEGRATION: PRE AND POST ASIAN 1997 FINANCIAL CRISIS. David Huang Tiong Ung DB

Transcription

1 ASEAN-5 COUNTRIES STOCK MARKET INTEGRATION: PRE AND POST ASIAN 1997 FINANCIAL CRISIS David Huang Tiong Ung DB Corporate Master in Business Administration 2012

2 usat Khidmat MakJumat AXadtmik ~1VERSm MALAYSIA SARAWAJ( P.KHIDMAT MAKLUMAT AKADEMIK UNIMAI ASEAN-5 COUNTRIES STOCK MARKET INTEGRA TION: PRE AND POST ASIAN 1997 FINANCIAL CRISIS DAVID HUANG TIONG UNG A dissertation submitted in partial fulfillment of the requirements for the degree of Corporate Master in Business Administration Faculty of Economics and Business UNIVERSITI MALAYSIA SARAWAK 2012

3 APPROVAL PAGE I certified that I have supervised and read this study and that in my opinion it conforms to acceptable standards of scholarly presentation and is fully adequate, in scope and quality as a research paper for the degree of Corporate Master in Business Administration. Dr. Evan Lau Poh Hock Supervisor UNIMAS This research paper was submitted to the Faculty ofeconomics and Business, UNIMAS and is accepted as partial fulfillment of the requirements for the degree of Corporate Master in Business Administration. Prof Dr. Shazali Abu Mansor Dean, Faculty of Economics and Business UNIMAS III

4 DECLARATION AND COPYRIGHT Name Matric Number : David Huang Tiong Ung : I hereby declare that this research is the result of my own investigations, except where otherwise stated. Other sources are acknowledged by footnotes giving explicit references and a bibliography is appended. Signature ~... Date ~ ~.uj-bft1~ J,o /'1. : r -~ Copyright by David Huang Tiong Ung and University Malaysia Sarawak IV

5 ACKNOWLEDGEMENT First ofall, I would like to give my thanks to Almighty God as He encourages me to further my study to the Corporate Master in Business Administration (''CMBA'') and provides me the boldness, wisdom and patience to complete this research paper. Secondly, my sincere appreciation is to my thesis supervisor, Dr Evan Lau who is willing to sacrifice his time by giving his advice, guidance and suggestions to me to make the completion ofthis research paper. I also want to thank to my family, especially my wife, for their support, love, patience, encouragement and understanding during the whole period ofmy study. Lastly, I wish to thank the University Malaysia Sarawak, for giving me the opportunity to study the CMBA and also all other lecturers such as Prof. Dr Shazali, Dr. Ernest, Dr. Liew, Dr. Phua, & many more whose name was not stated for sparing their time to share their knowledge with me. God bless you all. David Huang Tiong Ung July 2012 Corporate Master in Business Administration Faculty ofeconomic and Business University Malaysia Sarawak v

6 LIST OF TABLES Table Table la Table IB Table 2A Table 2B Table 3A Table 3B Title Augmented Dickey-Fuller (ADF) Unit-Root Test Statistics Pre-crisis: 1988:01 through 1998:06 Augmented Dickey-Fuller (ADF) Unit-Root Test Statistics Post-crisis: 1998:07 through 2011: 12 Johansen-Juselius Co integration Test Pre-crisis: 1988:01 through 1998:06 Johansen-Juselius Cointegration Tests Post-crisis: 1998:07 through 2011:12 Granger Causality Test Result Based On V AR Pre-crisis: 1988:01 through 1998:06 Granger Causality Test Result Based On VECM Post-crisis: 1998:07 through 2011: 12 Page LIST OF FIGURES Figure Title Page Figure la Figure IB Summary ofgranger Causality Test Results (Pre-crisis) 19 Summary ofgranger Causality Test Results (Post-Crisis) 21 Vl

7 ABSTRACT ~he objective of this paper is to study the relationship of the stock markets in the Association ofsoutheast Asian Nations (ASEAN-5) countries. In other words, it is to access the ASEAN-5 stock market integration or the long run relationship among the markets. The study of the integration is separate to two parts, which is Pre Asian 1997 Financial Crisis and Post Asian 1997 Financial Crisis. The rationale of this study is to determine whether the investor can have more benefit through international portfolio diversification within the region during pre-crisis and post-cris~ The empirical results suggest that the five stock markets are only co integrated after crisis but not in pre-crisis. Investor from outside the region can be benefited by the cointegration because the cost of investing is reduced and the liquidity speed is improved. Although the stock markets are integrated, but integration is not fully complete. Therefore, the investor inside the region is still can have the benefit from the international portfolio diversification. Vll

8 ABSTRAK Objektif kerja ini adalah untuk mengkaji hubungan pasaran saham di antara Negara-negara dalam Persatuan Negara-Negara Asia Tenggara (ASEAN-5). Dengan kata lain, tujuannya adalah untuk mengakses integrasi pasaran saham dalam ASEAN -5 atau hubungan jangka panjang di kalangan pasaran saham tersebut. Kajian integrasi ini dibahagikan kepada dua bahagian, iaitu pada tempoh sebelum and selepas Krisis Kewangan Asia Rasional kajian ini adalah untuk menentukan sarna ada pelabur boleh mempunyai lebih banyak manfaat melalui kepelbagaian portfolio antarabangsa di dalam rantau tersebut sebelum dan selepas krisis ini. Hasil kajian menunjukkan bahawa kelima-lima pasaran saham hanya berkointegrasi selepas krisis sahaja. Pelabur dari luar rantau ini dapat menerima manfaat dari kointegrasi tersebut kerana kos pelaburan telah dikurangan dan laju kecairan telah ditambah. Walaupun pasaran saham telah bersepadu, tetapi integrasi tersebut belum lengkap dengan sepenuhnya. Oleh itu, pelabur di dalam rant au ini masih boleh mendapat manfaat daripada pempelbagaian portfolio antarabangsa. viii

9 Pusat Khidmat MakJumat Akadtmik UNlVERSm MALAYSIA SARAWAK TABLES OF CONTENTS Page Approval Page Declaration and Copyright Page Acknowledgement List oftables List offigures Abstract Abstrak 111 IV V VI VI Vll V111 CHAPTER 1: INTRODUCTION 1.1 Overview 1.2 Background ofstudy 1.3 Problem Statement 1.4 Objective ofthe Study 1.5 Organization ofthe Study CHAPTER 2: LITERATURE REVIEW 2.1 Introduction 2.2 Theoretical Framework 2.3 Empirical Result ofprevious Studies 2.4 Concluding Remark CHAPTER 3:RESEARCH METHODOLOGY 3.1 Introduction 3.2 Data 3.3 Augmented Dickey-Fuller Unit Root Test 3.4 Johansen and Juselius Cointegration Test 3.5 Granger Causality Test CHAPTER 4: FINDINGS AND EMPIRICAL RESULTS 4.1 Introduction 4.2 ADF Unit Root Test Result 4.3 JJ Cointegration Test Result 4.4 Granger Causality Test Result IX

10 CHAPTER 5: CONCLUSION 5.1 Summary Research Conclusion Concluding Remark 23 BIBLIOGRAPHY 25 x

11 CHAPTER 1 INTRODUCTION 1.1 Overview Over the years, there had been a growing concern on the cointegrating of equity or stock markets. Previously, there are number of studies have been conducted pertaining to the stock market integration in ASEAN-5 1 countries (Oh et al. (2010), Phuan et al. (2009), Lim (2007), Sharma and Wongbangpo 2002, Lim et al. 2003, Click and Plummer 2005, and Manning 2002). Choudhry (1996) stated that the globalization had led to a co-movement of asset prices across international markets. This is due to the expansion and advance in technologies. This has eased and increased the speed of exchange information from one market to one market with a lower cost and less time. People can get the information easily, easier and faster than before. Therefore, investors can easily expand their investment portfolio to other countries. Besides, the capital across national boundaries has dramatically increased which increase the investment of the countries. A lot of developing countries are encouraging the foreign direct investment to their country to boost and develop their economy and market. Investors are welcomed to invest in the countries. On the other hand, the ultimate goal of investor is to get the maximum return in their portfolio investment. By expanding the portfolio investment to the other countries, there is a possible potential benefit from diversification of investment in international. Another reason for the co-movement of asset prices across international market are that there exists ofthe followers and leaders of stock market in international level. Some countries are the followers because they are still not matured and still developing their stock market. They will tend to follow the stock market with has more matured and developed than them (see Choudhry, 1996). 'lndonesia, Malaysia, Philippines, Singapore, and Thailand. 1

12 Previous studies had state that there were no stock market integration during the precrisis in the long run, however, in the short run, there is a significant linkage of ASEAN-5 market except Indonesia (Azman-Saini et ai., 2002). Indonesian market is said to be no relationship with others ASEAN-5 stock market. Among the ASEAN-5, Malaysia was a significant influential market. Only Thailand and Singapore is said to be the most linkages of stock market with other stock markets. Oh et al. (2010) had improve the result by having a result that there was partial market integration exist during pre-asian 1997 Financial Crisis period but a full market integration during post-crisis. The linkage of stock markets has been an important and concern issues because investors or fund manager can gain from international portfolio diversification (Ewing et al. 1999, Lim et ai. 2003). It means that they can benefit when they invest across the countries, in other word, "Diversification". It is said that higher benefit can be gained from the international portfolio diversification only when they are available to reduce risk but keep the expected return at the same degree between domestic country and other country. 1.2 Background of Study Association of Southeast Asian Nations ("ASEAN") was formed on 8 th August By the time, the ASEAN was consisting of Indonesia, Malaysia, Philippines, Singapore and Thailand ("ASEAN-5). ASEAN was then added five more countries i.e. Brunei, Myanmar, Cambodia, Laos and Vietnam. One of the objectives to form the ASEAN is to accelerate the economic growth and strengthen the economic status. The whole ASEAN have combined population of approximately 608 million people (8.85% of world population) and their combined gross domestic product had growth to US$2.15 trillion in Since late of1980s (pre-crisis), ASEAN countries had a rapid economic growth. This is then following by the high 2 The&e figures were from International Monetary Fund, World Economic Outlook Database. 2

13 improvement in ASEAN countries' stock markets. "Over the 7-year period ( ), the market capitalization of Indonesia, Malaysia, Philippines, Singapore, and Thailand grew %, %, %, 83.69%, and %, respectively" (Sharma & Wongbangpo, 2002, p. 301). In that situation, the market capitalization had increase which induces a boom and rapid growth in ASEAN countries' economy. The ASEAN fmancial crisis started in July 1997, in Thailand. The crisis also called East Asian fmancial crisis because it is originated in East Asia. During the time, Thailand was decided to float its Thai Baht which led to the meltdown in Thailand and thus starting the Contagion Wave Effect. The crisis had affected currencies, stock markets and other asset prices in several Asian countries. The effects are then rippled to the globe and cause a globe financial crisis. The stock markets in the affected region were declined sharply. This has caused a serious impact to the investors and fund managers who aim to get the benefit from international portfolio diversification. The United States was only briefly affected by the crisis. Among the ASEAN-5 countries, the most affected by the crisis is Indonesia and Thailand. The stock of Indonesia (Jakarta Stock Exchange) reached a new historic low in September Same with the Thailand, the Thailand stock market dropped 75% in Malaysia and Philippines also experience bad affect from the crisis. There are also downgrades and a general sell off on the stock and currency. However, Singapore was relatively unaffected by the Crisis. Singapore economy only tum into a short duration of recession and it is a result of contagion ofthe crisis in global. The ASEAN stock market crash in July 1997 which cause by the East Asian financial crisis had made all markets in ASEAN experience financial crisis. This had affected the stock market of the ASEAN. By this, there is a possibility that the relationship among the stock markets in the ASEAN countries have been changed. 3

14 1.3 Problem Statement In order to protect the return and reduce the risk of investment, the investors have to diversify their investment. They can do the portfolio diversification across countries to achieve that. However, it is not easy for the investors to identify which stock market of a country to be entered. If they build a across country portfolio investment where the stock market of the countries are cointegrated, the investors cannot enjoy the risk reduction instead they will suffer even larger loss in their investments. There are significant studies on the stock market integration on ASEAN-5 for the period before and after the 1997 crisis (see Wong 2004; Yang et al and Oh et al. 2010). The results showed that there is no cointegration found before crisis but the situation was change during and after the crisis. The cointegration concept shows that there is long-run relationship among the stock market and thus this will give a significant impact on the return ofinvestment ofthe investors within the region. Therefore, it is essential to know the whether the stock market of another country is cointegrated with their home country. By identify and solve this issue, investors can create and manage their investment portfolio well and reduce the risk from reduction on investment return. 1.4 Objective of the Study The objective of this study is to help the investor to create and diversify their investment with a more efficient way so that the risks of their investment can be reduced and achieving the benefit ofinternational Portfolio Diversification. The general objective to conduct this study is to help the investor to identify whether it is a good way to create and diversify their portfolio investment within ASEAN-5 countries' stock market so that they are able to gain more benefit by doing portfolio diversification. The specific objectives ofthis study are as follows: (i) to identify the long run relationship between pre and post 1997 crisis. 4

15 Pusat Khidmat MakJumat Akademik UNIVERSITI MALAYSIA SAKAWA){ (ii) to test the existence ofgranger interplay between the stocks. 1.5 Organization of the Study This paper is organized as follows; section 2 will show the literatures reviews which are surrounding this issue. Section 3 will show the methodology. Section 4 will present and discuss the result. Section 5 is a sunnnary and a conclusion. 5

16 CHAPTER 2 LITERATURE REVIEW 2.1 Introduction There had been significant studies in regards to the stock market integration. There are more studies that have been done on ASEAN pre-crisis than post-crisis. Besides, many studies have round that the stock market in emerged market is more independence. Some of the paper had trying to find the evidence of cointegration pre and post-globalization. In this chapter, 2.1 will discuss on the theoretical framework, 2.2 will discuss the empirical evidence, and the last one is 2.3 which is the concluding remark of literature review. 2.2 Theoretical Framework In theory, economy growth can be contributed by many factors like stock market size, liquidity, and integration with world capital markets. According to Levine and Zervos (1996), the stock market of a country can positively affecting the development of the country itself Their research showed a close relationship between overall stock market and long-run economic growth. They found that the economy growth is contributed by the degree of liquidity in the stock market. In other words, the investment in the long-run can be eased by liquid stock market. However, Azman-Saini et ai. (2002) and Jung et ai. (2004) have the same opinion that the increase flowing of capital from boundaries can result of market interdependency and thus, accelerate the growth of a developing country. When the developing country can access to the international financial markets, its saving can be augmented and the cost of capital within the domestic fmancial sectors can be reduced (lung et ai., 2004). The stock markets integration are happened when the risk in different countries or the ability to reduce risk can result of same expected returns (see Ewing et ai., 1999; Lim et ai., 2003). Therefore, Lim et ai suggested that the diversification benefits can be measured 6

17 through the gain of expected returns and reduction risk. Morana and Beltratti (2006) stated that the gain through international diversification is depending on the low correlations across international stock markets. However, the concept of cointegrated stock markets is that the investor who is managing their portfolio through international portfolio diversification, the potential benefits will be limited or disappeared (see Azman-Saini et ai., 2002; Ewing et ai., 1999; Lim et ai., 2003). Ewing et al (1999) stated that the cointegration of the stock markets is caused by country policy which is financial deregulation. In other words, the trades barriers are more relaxed and more foreign fund are attracted to the country. However, the relationship or the integration is changing over time. Yang et ai. (2003) stated that the degree of integration is changing especiauy after financial crises had happened. 2.3 Empirical Result of Previous Studies There were a lot of studied on the market integration either in emerging countries or emerged countries. Firstly, we will discuss the studies that have been done on the countries which are fall outside ofasean. Choudhry (1996) had studied the long run relationship between six different European (Czechoslovakia, France, Italy, Poland, Spain, and Sweden) stock markets. He used Johansen multivariate cointegration tests by using monthly data. He found that there is no long-run relationship during the post-crash period ( ). Only pre-crash period found to have long run relationship. Chen et al (2002) also showed that the investors can diversify their portfolios in Argentina, Brazil, Chile, Colombia, Mexico and Venezuela because they failed to show the evidence that the stocks markets are integrated. Masih and Masih (2001) also conducted a study to investigate the relationship among OECD and Asian stock markets. They found out that the long-run relationship among the OECD and Asian stock markets did exist 7

18 from 1983 to Ewing et at. (1999) did a studied of the stock market linkages of N AFT A and North American. They are testing over the pre-us stock market crash period, 1987: 11 through 1997:03. In this study, they failed to show the evidence of cointegration in all these markets which mean there is no long run relationship. Arshanapalli and Doukas (] 993) also try to examine the linkage stock market of Germany, United Kingdom, France, Japan, and United States by using daily data. They found that in the pre-crash period, France, Germany and UK stock markets are not related to US stock market. However, in the post-crash period, France, Germany and UK have interrelationship with US stock market. US and Japan stock market do not have relationship and Japan was independence when compare with the European stock market. Pascual (2003) also failed to find the evidence ofthe long-run equilibrium in the stock markets of UK, French, and German. As for the studies that have been done in Asia countries, Oh et al. (2010) had conducted a study on the market integration in ASEAN-5 countries using JJ Co integration Analysis and Granger Causality Test. The result showed that there was only partial market integration prior to the 1997 Asian Crisis. However this situation completely changes during post-crisis. The result showed that the market is fully integrated after the 1997 Asian crisis. This means that the fmancial crisis had led to the stronger stock market integration. Phuan et al. (2009) also did a research to find out if the process of financial liberalization has any contribution to the stock market integration in ASEAN-5 countries. They divided the study into three periods. During the first period ( ), Singapore Stock Market was liberalized, the stock markets of Singapore and Indonesia do not granger caused by any countries in ASEAN-5. However, only Thailand and Singapore are granger caused other countries. During the second period ( ), when Thailand, Malaysia and Indonesia's stock market liberalized, Singapore started granger caused by other countries like Malaysia and Philippines. Indonesia was independent during this period. During the third period ( ), when Philippines stock market 8

19 liberalized, more long run relationships were established. However Singapore stock market did not influence by other countries. Lim (2007) used daily data from to test the market integration among ASEAN-5 countries. The result showed consistence with Phuan et a1. (2009) and Click & Plummer (2005) that there was an increasing in the market integration in ASEAN-5 after crisis when compare with pre-crisis. Masih and Masih (1997) studied on the Asian Newly Industrializing Countries (NIC) which consists of Hong Kong, Singapore, South Korea and Taiwan, with established market which consists of Japan, USA, UK and Germany. The result oftesting the cointegration shows that NICs have long run relationship with established market. In others word, established market have a leading role on the NIC markets. Yang et al (2003) test the stock market integration related with fmancial crisis between Asian stock market and US and Japan stock market. The result shows that these markets have show interrelationship during the crisis. However, after the crisis, the stock market is more integrated. Japan and United State is playing a leading role in these stock markets. Azman-Saini et al (2002) tests on the ASEAN-5 stock market. They find cointegrated in these stock markets. However, Singapore showed that it was only affected by Philippines. In others words, Singapore stock market can be considered as an exclusive market. Lim et al (2003) was also studied on the ASEAN-5 stock market. They used Bierens's test which show the result that ASEAN stock market are cointegrated in long run. This result was consistence with Azman-Saini et al (2002) which show those stock markets have shared a long-run relationship. According to Lim et al (2003), the process of fmancial liberalization will tend to make the stock markets more integrated. Sharma and Wongbangpo (2002) found that 4 countries (Malaysia, Thailand, Singapore, and Indonesia) stock market has long run relationship (inefficient market) except of Philippines market (efficient market). This result is a bit different with Lim et al (2003) and Azman-Saini et al (2002) where Philippines shows itself as an independence market. Manning 9

20 (2002) was testing on the South East Asian equity markets from 1988 to He found that Asian markets (excludes Japan, Korea and Taiwan) have relationship with the (external) US market by mid Concluding Remark Most of the studies show that pre-globalization in emerged countries and pre-crisis in Asia countries, have less or no cointegration in the long run relationship. However, the situation changes when the period is change to post-globalization and post-crisis. This indicated that in the world now, the direction and relationship among stock markets are changed. They showed more integrated than before. This has become and important information as investors hard to gain returns from making portfolio diversification investment ifthe markets are integrated. 10

21 CHAPTER 3 RESEARCH METHODOLOGY 3.1 Introduction Granger (1983), Granger and Weiss (1983), and Engle and Granger (1987) had introduced a new statistical concept which is used to test co integration. Generally, a linear combination of two variables has to be stationary. After that, the two variables can be considered as cointegrated. Otherwise, the two variables are said no cointegrated and no longrun relationship. "In terms of cross-border equity market efficiency, cointegration implies that national stock market indices are linked even if the stock market indices are non-stationary" (Arshanapalli and Doukas, 1993). Therefore, this can be used to test whether a national market index is cointegrated with others stock market index. When DXt is stationary, x is said will be integrated oforder one. (1) L and D are lag operator and difference operator. a; (L) and T; (L) are polynomials in L with all roots outside the unit circle. 8; is drift parameter whereas 8; is white noise stochastic with E( 8; ) = 0 and Var ( 8; ) = (J2 < oq According to Arshanapalli and Doukas (1993), to show the concept of co integration (x cointegrated with y), there must exist an error-correction. x - X-I = a o+alzt-i + /31(L)(Xt - X)+ /32 (L)(Yt - Yt)+8It Yt- Yt-I =a 2 +a 3 Z t-1+ /33 (L)(X - X)+ /34 (L)(Yt - Yt_I)+82t (2a) (2b) Where Xt is stock price index of country i and Yt is another country's stock price index, /31' P2' P3 and /34 are polynomials, L is lagged operator, 81t and 8 2t are white noise error terms, and Zt-I is the lag value oferror term. 11

22 Error correction model is interpreted as follow. The change in x is because ofthe short run effect by the change in y. Zt-I is the long run adjustment to the equilibrium level. Therefure, in order to test for the stock market integration, Augmented Dickey-Fulley (Dickey and Fuller, 1979) Unit Root Test ("ADF Unit Root Test"), Johansen and Juselius (1990) Cointegration Test ("11 Co integration Test") and Granger Causality Test with Vector Autoregressive Model (''V AR Model") and Vector Error Correction Model (''VECM'') are conducted on this research. 3.2 Data This study is using monthly stock price indices from January 1988 to December 2011 ofasean-5 stock markets. The stock names are Kuala Lumpur Composite Index (KLSE) for Malaysia, Stock Exchange of Thailand (SET) for Thailand, and Jakarta Stock Exchange (JSX) for Indonesia, Philippine Stock Exchange (PSE) for Philippines, and Straits Times Index (STI) for Singapore. The source of data is from Yahoo Finance. The study is separate into two parts. The first part is to study the pre-crisis period (from 1988 January to 1998 June). The second part is to study the post-crisis period (from 1998 July to 2011 December). All the data are transfunned into logarithm form. 3.3 ADF Unit Root Test A time series data will have problem if it has spurious correlation. Spurious correlation is a strong relationship between two or more variables that is cause by a statistical fluke or by the nature ofspecification ofthe variables, not by a real underlying causal relationship. In other words, there exists a non-stationary in data. ADF Unit Root Test is used to test for the nonstationarity. This can help to check if there is able to reject the hypothesis nuji which means that the result will be stationary and will be integrated in what order. If a time series data has a 12

23 unit root or non-stationary, the data exhibits a stochastic trend. Otherwise, it will exhibit a detenninistic trend. The equation ofadf test and hypothesis test are: p-i I1Yt = po+ 8Yt-1 + L a.ii1yt- I + J.1t (3) i=1 Where p. is a constant or drift. HO: (J =0 --- (non-stationary) HA: (J < (stationary in ftrst difference) Ifthe Ho can be rejected, then the data is in stationary. 3.4 JJ Cointegration Test After running the ADF Unit Root Test, JJ Cointeration Test will be applied to test the long run relationship among the variables. JJ Cointeration Test is applicable when the time series data are consisting unit root in level and stationary in first difference 1(1). It is believed that oointegration is meaning that the movements of all the time series data are relative to each other. Choudhry (1996) stated that the nonstationary time series are cointegrated if a linear oombination ofthese variables is stationary. JJ Cointeration Test is using the maximum eigenvalue test (Amax) and trace test to identify how many cointegrating vectors have in the particular time series data. The equation of the test is as follows: k 8 Z, =J.i +Ir,.l1 Z/-; +n ZI-1 + &/ (4) ;=1 Where Z/ is a vector of variables which is in levels. J.1 is a constant term. IT = et{3' where ex is the adjustment coefficients and {3 have the cointegrating vectors. The hypothesis ofthe test for equation (4) is as follows: Ho: r = (Do not have long run relationship --- Not cointegrated) --- (have long run relationship --- Co integrated) 13

24 If it is able to reject the hypothesis null, then we can conclude that the variables are cointegrated. However, if we are not able to reject the hypothesis nul~ then we have enough evidence that the variables are not cointegrated. 3.S Granger Causality Test This test is conducted to examined whether one variable, let say, x, help to explain current changes in another variable, let say, y. q q AY =Cl + L J3jllYI - j + L YjL1XI - j + J.1lt (5) j=l j=l q q AX =Cl + L 8jllYI - j + L AjL1Xt - j + J.12t (6) j=l j=1 Where A is the first difference operator and AYand AX are stationary time series. When want to detennine whether causality run from X (independent variable) to Y (dependent variable), then equation (5) should be used. If X do not granger cause Y, and want to test whether Y granger cause X, equation (6) should be used where the dependent variable become X and Y will be independent variable. The null hypotheses ofgranger causality test for equation (5) is as follows: --- (X does not granger cause Y) --- (X does granger cause Y) The null hypotheses ofgranger causality test for equation (6) is as follows: --- (Y does not granger cause X) --- (Y does granger cause X) When conducting the Granger Causality test, if it is able to reject the hypothesis null, then we can conclude that the variable is granger cause another variable. 14