Causal nexus of foreign stock prices on the Philippine stocks exchange composite index

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1 Uv. of M. Itl. Mult. Res. Jour. 06, (, Causal exus of foreg stock prces o the Phlppe stocks exchage composte dex Reyaldo C. Castro Exteral Relatos ad Iteratoal Affars Offce (ERIAO, Uversty of Mdaao, Davao Cty, Phlppes E-mal: dog_mlot@yahoo.com Date receved: 6 Aprl 06 Date accepted: 3 September 06 Date publshed: 6 December 06 ABSTRACT Ths study vestgates the predctve relatoshp exstg betwee the Phlppe Stocks Exchage Idex (PSEI ad the foreg stock markets. hstorcal data of the daly closg prces of the stock markets (s&p500 of the uted states, Nkke of Japa, Sesex of Ida, Shcomp of Cha, STI of Sgapore, KLSE of Malaysa, ad HKSE of hog kog coverg Jauary 4, 00 to Jauary 9, 06 (3,4 observatos were estmated usg the Ordary Least Squares (OLS regresso equato, havg the PSEI of the Phlppes as the predcted varable. It was foud out that the foreg stock markets are hghly correlated wth the PSE. Moreover, OLS regresso revealed that a crease of the daly closg prces of s&p500 of Uted States, Nkke of Japa, Sesex of Ida ad STI of Sgapore creases the value of the PSEI but decreases upo the apprecato of Shcomp of cha ad the HKSE of Hog Kog. Meawhle, KLSE of Malaysa yelded o statstcal sgfcace towards the PSEI. Keywords: Stock, Market, Exchage, Idex, OLS, Phlppes. INTRODUCTION The world equty markets are evolvg rapdly due to chages techology, chages regulato ad fallg barrers teratoal trade. Cosequetly, faster formato flow makes the equty markets more volatle tha the market effcecy assumed. Succctly put, the volatlty oe market ca spllover to aother ad teds to cotue after that market closes ad producg volatlty geographcally dstat markets opeg several hours later (Fredma & Shachmurove, 997. I partcular, assertos that facal markets are ow characterzed by hgher levels of volatlty tha the past ad t dsplays greater susceptblty to cotago ad spllover effect that have cosderable promece recet years. Thus, stock prces some sese should be more volatle tha s cosstet wth market effcecy. Most stock prce chages caot be solely assocated wth cotemporaeous chages vestors expectatos of futures corporate profts, as to some extet, stock prces frequetly fluctuate respose to varables urelated to dvded prospects. For example, the October 987 crash New ork set off worldwde stock prce decle, whch dcates as a bear-market cotago. Such epsode has bee terpreted by some observers as evdece of a chage the behavor of preset day facal markets (Kg & Wadhwa, 990; Shller, Koya, & Tsutsu, 99. There are several reasos why returs ad volatlty of the two equty market may be related. The two ecoomes are related through trade ad vestmet, so that ay ews about ecoomc fudametals oe coutry most lkely has mplcatos for the other coutry (Boubaker & Saber, 008; Lu, Resck & Shoesmth, 004; Kazoj, 00; Asmakopoulos, Goddard & Sropoulos, 000. Aother possble reaso for the teratoal correlato of stock prce chages s market cotago (Heradez, Ibarra & Trupk, 03. Due to the globalzato process, ecoomes are related to each other otably through trade ad vestmet, so ay ews about ecoomc fudametals oe coutry most lkely have mplcatos other coutres (Dg et al., 0; L et al., 994. It mples that chages stock prce oe coutry 34

2 Uv. of M. Itl. Mult. Res. Jour. 06, (, may be affected by the chages aother coutry beyod what s expected based o the ecoomc fudametals. Ths could be due to the closer relato betwee the world equty market ad terdepedece of regoal as well as the global ecoomy. Probably the best kow examples are the stock market crashes of 99, 987 ad 997 ad the more recet turbulece o the regular bass. Recet studes have vestgated how ews from oe atoal facal market flueces the volatlty aother market. Several researches demostrated that prvate formato s oly gradually corporated to prces (Bwo-Nug & Ch, 00; Dash, 00; Kyle, 985; Admat & Pflederer, 988. They dcated that market dyamcs cause the cotuty of volatlty after a shock ed (Lee, Ru & Wag, 004. Recetly, Sayso (06 reported that the Phlppe equtes, dubbed the worst-performg market Southeast Asa ths year, had the bggest two-day foreg outflow sce September as cocer about Cha s ecoomc slowdow ad slumpg ol prces sap demad for developg-ato assets already hurt by hgher U.S. terest rates. Overseas vestors have sold $38. mllo of the coutry s shares so far ths year. They wthdrew a record $.9 bllo 05 to become et sellers for the frst tme sce 008. Wth ths bulk of studes ad reports, oe provded recet evdece that ews oe market could partally predct the mea retur other markets. Ths study attempts to vestgate the spllover effects of developed facal markets to the Phlppe Stocks Exchage Idex (PSE. Theory base The theory of effcet captal market says that the prces of facal assets equal the dscouted value of the expected cash flows that these assets geerate. Smlarly, stock market effcecy mples that stock prces equal the dscouted value of expected cash flows from vestmet the shares. Therefore, t s assumed that vestors forecast future cash flow based o avalable formato (Grager, 99. If captal markets are effcet ths sese, chages stock prces wll reflect ew formato. Moreover, publcly avalable formato s dscouted asset prces as soo as t becomes avalable the market. To date, study of volatlty spllovers across tradg ceters has focused o the foreg exchage market, whch also trades aroud-the-clock several stes. Researchers proposed two hypotheses o how volatlty mght mafest tself across tradg ceters (Flemg, 003. The heat wave hypothess s that a market s retur ad volatlty are explaed wth ts past values ad are determed by coutry-specfc effects. It ca be better uderstood whe volatlty has oly locato-specfc autocorrelato so that a volatle day New ork s lkely to be followed by aother volatle day New ork, but ot typcally a volatle day Tokyo (Bwo-Nug & Ch, 00; Dash, 00. O the other had, the meteor shower hypothess fers that a market s retur ad volatlty caot be explaed just wth ts past values ad there are retur ad volatlty spllovers to a market from others, whch s typcally exemplfed whe traday volatlty splls over from oe tradg ceter to aother so that a volatle day New ork lkely to be followed by a volatle day Tokyo (Dash, 00; Bwo-Nug & Ch, 00. METHOD Research desg Ths study utlzed the causatve research desg usg the tme-seres methodology. Causal method of research requres of a causal ferece whch was fouded o the assumptos of exstece of relatoshp of two evets, the tme-lag order that cause must precede effect, ad fally, that alteratve explaato must be ruled out (Murca & Tamayo, 05; Marczyk, DeMatteo & Festger, 005. I ths study, causal 35

3 Uv. of M. Itl. Mult. Res. Jour. 06, (, research desg was used such that the study amed to determe f there s a causal exus ad, more especally, spllover effect of developed facal markets towards the Phlppe Stocks Exchage dex. The study attempts to test for the causal exus across daly tradg the Phlppe facal market by vestgatg the spllover effect of foreg markets o the same day of tradg. Sources of data The researcher made use of secodary data coductg the study. Secodary data were used sce the data were readly-avalable publshed or compled sources. The researcher accessed the publshed as well as ole reports compled by Bloomberg ad Wall Street webstes for the daly closg prces of selected world stock markets for a perod coverg Jauary 4, 00 to Jauary 9, 06. A total of 3,4 observatos were take for all the stock markets. Data gatherg procedure The researcher dowloaded daly tme-seres data of the seve selected facal markets from Asa ad the US, from the Bloomberg, Wall Street ad Bagko Setral g Plpas (BSP webstes. Data were checked for matches across tme ad spected for mssg data ad outler usg tests of ormalty. The estmato was doe both gretl 9.0 for the observatos coverg Jauary 4, 00 to Jauary 9, 06. Furthermore ths study seeks to exame whether past formato regardg the stock market returs oe foreg market affects a partcular markets curret mea retur or ot, ad smlarly past formato of volatlty oe market affects other markets curret volatlty or ot. Ths meas that the Phlppe Stocks Exchage market s tested f t s (or ot flueced by past volatltes of foreg markets, e.g. S&P500 (US, NIKKEI (Japa, SENSE (Ida, SHCOMP (Cha, STI (Sgapore, KLSE (Malaysa, ad HKSE (Hog Kog. Data aalyss To determe the causalty of the sx foreg facal stock markets to the Phlppe Stocks Exchage dex, the ordary least squares regresso (OLS was used. Maddala ad Nelso (974 oted that the OLS method of estmato ca easly be exteded to models volvg two or more explaatory varables, whch ca be llustrated gve the case of two explaatory varables, ad, wth the depedet varable. We therefore have a model α u α,, Where u ~N(0,σ. We look for estmators so as to mmze the sum of squared errors, S ( α Dfferetatg, ad settg the partal dfferetals to zero we get S α ( α ( 0 ( 36

4 Uv. of M. Itl. Mult. Res. Jour. 06, (, S ( ( α 0( S ( ( α 0 (3 These three equatos are called the ormal equatos. They ca be smplfed as follows: Equato ( ca be wrtte as α or α (4 Where the bar over, ad dcates sample mea. Equato (3 ca be wrtte as α Substtutg the value of α from (4, we get ( (5 The varaces of our estmators are gve by ( ( r S Var σ ad ( ( r S Var σ, where r s the squared correlato coeffcet betwee ad. Thus, the greater the correlato betwee the two explaatory varables, the greater the varace the estmators,.e. the harder t s to get sgfcat results. We smlarly obta estmates for σ ad therefore the stadard errors of the parameter estmates, ad thus the t-ratos. RESULTS AND DISCUSSION To determe the statstcal propertes as well as ormalty of the stock markets cluded pror to the ecoometrc aalyses to be appled for each, descrptve proflg was doe usg mea, meda, mmum

5 Uv. of M. Itl. Mult. Res. Jour. 06, (, ad maxmum values, kurtoss ad skewess of each of the seres. I addto, Jarque-Bera test was also used to determe the ormalty of each of the seres. Table. Statstcal Propertes of the Tme-Seres Data of the Stock Markets Test Statstc PSEI S&P500 NIKKEI SENSE SHCOMP STI KLSE HKSE Mea Meda M Max SD Skewess Kurtoss J-B Prob Obs Source: Author s Calculatos (va gretl 9.0 Large stadard devatos of each seres dcate hgh volatlty of stock prces of each coutry. Ths s otable for S&P500 of the Uted States, NIKKEI for Japa, SENSE of Ida ad HKSE of Hog Kog. I terms of skewess, data of STI of Sgapore ad HKSE of Hg Kog show egatve skewess, mplyg the dstrbuto has a log left tal, whereas all other seres have postve skewess mplyg log rght tals. All values are less tha.0, mplyg that the skewess s substatal ad the dstrbuto s far from symmetrcal. O the other had, the values of excess kurtoss for all seres are less tha 3, mplyg that dstrbutos are relatvely ormal. Moreover, the Jarque-Bera tests reject the ull hypothess of ormalty at ad 5 percet levels of sgfcace. Ths s see the graphs Fgure, showg o-ormal dstrbuto of the seres. Hece, the samples approprately cota characterstcs such as volatlty clusterg ad log tals but ot of leptokurtoss. 38

6 Uv. of M. Itl. Mult. Res. Jour. 06, (, Fgure. Daly Values of the Stock Prces of Selected Coutres from Jauary 4, 00 to Jauary 9, 06 A assumpto of the multple regresso model s that there s o exact lear relatoshp betwee ay of the depedet varables. Thus, Pearso s correlato aalyss has bee performed here to check the exstece of multcollearty. A suggested rule of thumb s that f the parwse correlato betwee two regressors s very hgh, excess of 0.8, multcollearty may pose serous problem. Accordg to Table, several stock markets show very hgh correlatos. The stock markets that are foud to have very sgfcat correlatos wth PSEI s S&P 500 (r0.853, p<0.0, SENSE (r0.80, p<0.0. S&P 500 was also foud to sgfcatly correlate wth all stock returs, wth r-coeffcets greater tha 0.80, partcularly wth SENSE (r0.94, p<0.0 ad KLSE (r0.955, p<0.0. SENSE sgfcatly correlated wth all stock returs, especally STI (r0.89, p<0.0, KLSE (r0.934, p<0.0 ad HKSE (r0.90, p<0.0. Moreover, STI hghly correlated wth KLSE (r0.876, p<0.0 ad HKSE (r0.94, p<0.0. KLSE ad HKSE also hghly correlated (r0.80, p<0.0. These sgfcat correlatos are foud to be hgher tha 0.8, dcatg that there mght be possble multcollearty that exsts amogst selected depedet varables. 39

7 Uv. of M. Itl. Mult. Res. Jour. 06, (, Table. Correlato Matrx of the Selected Stock Prces of the World s Stock Markets Varables PSEI SP500 NIKKEI SENSE SHCOMP STI KLSE HKSE PSEI SP ** NIKKEI.778 **.477 ** SENSE.80 **.94 **.476 ** SHCOMP.448 **.448 **.440 **.66 ** STI.77 **.794 **.544 **.89 **.673 ** KLSE.78 **.955 **.387 **.934 **.55 **.877 ** HKSE.70 **.78 **.483 **.90 **.75 **.94 **.876 ** Source: Author s Calculatos (va IBM-SPSS 0 Table 3 reports the ordary least-squares regresso results that ted to determe the effect of each foreg stock market to the Phlppe Stocks Exchage Composte Idex (PSEI. The value of the R s 0.96 whch mply that the varablty of PSEI prce s hghly explaed by the varato of all selected foreg stock markets for the perod coverg Jauary 4, 00 to Jauary 9, 06. The F value s sgfcat at the 0.05 level (F57.5. Therefore at 5% sgfcace level, t ca be statstcally cocluded that the model fts to expla the effect of selected foreg stock markets o the Phlppe Stocks Exchage Composte Idex. Table 3. Least-Squares Regresso Results Showg the Causal Relatoshp of Foreg Stock Markets o the Phlppe Stocks Exchage Stock Markets Coeffcet Std. Error t-rato p-value (Costat <0.000 SP <0.000 NIKKEI <0.000 SENSE <0.000 SHCOMP <0.000 STI <0.000 KLSE HKSE <0.000 Mea depedet 3.96 S.D. depedet var var Sum squared resd S.E. of regresso R-squared Adjusted R-squared 0.94 F(7, p-value(f Lookg o each coeffcet of the foreg stock markets, t ca be surmsed that there are two mportat causaltes that ca be gleaed: the egatve ad postve effects. As for postve effects, the S&P500 of the Uted States, NIKKEI of Japa, SENSE of Ida ad STI of Sgapore have postve coeffcets, whch mea that a crease of ut of these stock markets wll cause a respectve 0.08, 0.045, 0.0 ad 0.5 crease of the PSE Composte Idex of the Phlppes, holdg other varables costat. Of the four markets, the oe that has a cosderable effect s the STI of Sgapore. Ths strog causal exus s reported ad valdated by the Sgapore Busess Federato (04, averrg that Sgapore ad the Phlppes are ejoyg a close blateral relatoshp, whch wll be a key drver for the rego to work towards closer ecoomc tegrato. The Phlppes ecoomc resurgece s drve by robust growth domestc demad, strog frastructure spedg ad structural ecoomc reforms, whch have led to reewed vestor terest. Moreover, the stregtheg ecoomc relatos mea robustess of ther 40

8 Uv. of M. Itl. Mult. Res. Jour. 06, (, facal markets. De Leo (04 also espoused that sce the, blateral relatos of Sgapore ad Phlppes have become stroger. From the peace agreemet collaborato dow to ther toursm dustres, the macroecoomcs of Sgapore have prove to provde amable exus towards the Phlppes as uderped also the growth of each ecoomy, mmgrato, commerce, securty ad toursm. As for the egatve effects, the SHCOMP of Cha ad the HKSE of Hog Kog exhbted egatve beta coeffcets, whch mea that a crease of ut of these stock markets wll hurt the PSE Composte Idex by 0.03 ad 0.0 respectvely, holdg other varables costat. Ths was mcal to the recet hullabaloo the PSE Composte dex, kow as the Black Moday where the Phlppe Stock Exchage Idex (PSE fell sharply, closg at 6,88.6, dow 87.7 pots or 4.37%. Sayso (06 reported that the decle was the steepest sce the August 4, 05 Black Moday, whe the Phlppe stock market pluged 6.7% or pots dow. Gozales (06, however, attrbutes ths relatoshp to the move of Cha to devalue ts currecy, the yua, kockg over three percet off ts value. It was beleved that Cha attempts to boost exports support of ts slowg ecoomc growth although the state-ru People s Bak of Cha sad the devaluato s all part of reforms as the ato moves toward a more market-oreted ecoomy. I effect, moey maagers, cludg foreg fuds, are assessg ad rebalacg ther exposure to emergg markets followg the sell-off, addg that the stuato though does ot chage what s happeg the real ecoomy, wth the growth drvers seemgly tact, ctg the strog busess process outsourcg performace, robust cosumer sector, lower flato, ad growth frastructure. CONCLUSION Ths study shed lght o the tal hypothess of possble effects of foreg stock markets to a stock market of a developg coutry lke the Phlppes. Ths study cosdered the effects of the coutres stock returs ad ther resultg oscllatos towards the movemet of the Phlppe stock market. Ths les o the premse of what happes to a larger stock market relato to a smaller stock market. I effect, ths ca be substatated of the close ecoomc tes of these coutres, whch s true the case of the Phlppes. PSE stocks are apprecated the boost of the Amerca, Japaese, Ida ad Sgaporea stock markets. Of the four, the Sgaporea stock market provded a more sestve effect o the oscllatos of the PSE Composte dex due to the stregtheed ecoomc relatos brought by ASEAN Itegrato. O the other had, the Chese ad Hog Kog stock markets oscllatos may hurt the PSE. Ths mght be attrbuted to certa decsos of the Chese govermet,.e. devaluato of ther currecy, yua. No sgfcat effect of the Malaysa stock market was evdet. Note that the tme perod coverg Jauary 4, 00 to Jauary 9, 06 was able to capture sgfcat ecoomc ad poltcal shocks, despte of ts o-mplct dscussos the paper. Fally, whle the PSE Composte dex s affected by the coutres, t s oteworthy that other sgfcat factors ca fluece the movemet of the latter. Hece, t s very mportat that the Phlppe govermet mata healthy domestc polces order to mata the stablty of the stock market. 4

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