Foreign equity flows: Boon or bane to the liquidity of Malaysian stock market

Journal Article
Ping-Xin Liew, Kian-Ping Lim and Kim-Leng Goh
North American Journal of Economics and Finance, Elsevier, 45, 161-181
Publication year: 2018

Abstract

This paper examines the impact of gross foreign equity inflows on aggregate liquidity of the Malaysian stock market using newly assembled foreign trading data and the best performing bid-ask spread proxy. Employing vector autoregression, we discover a one-way causality from gross inflows to aggregate liquidity, and foreign investors erode liquidity of the Malaysian stock market. Additional analyses reveal that uncertainties in the U.S. markets negatively affect aggregate liquidity through the flows of foreign institutions, whose positive feedback trading destabilizes the local bourse. Despite the shocks, there is sufficient liquidity provision from local state-backed institutional funds and local proprietary day traders.

Keywords

Foreign equity flows; Aggregate liquidity; Malaysian stock market; Vector autoregression; VIX

Investor heterogeneity, trading account types and competing liquidity channels for Malaysian stocks

Journal Article
Kian-Ping Lim, Tze-Chung Thian and Chee-Wooi Hooy
Research in International Business and Finance, Elsevier, 41, 220-234.
Publication year: 2017

Abstract

This paper examines the relationship between various investor groups and stock liquidity for Malaysian public listed firms over the 2002–2009 sample period. Using the Amihud illiquidity ratio, we extend the literature by addressing the issues of investor heterogeneity, trading account types and the interactions of competing liquidity channels. The analysis reveals that only local institutions and local individual investors who trade through the direct accounts are significantly associated with the liquidity of domestic firms. In contrast, the significant liquidity effect for foreign investors operates through the nominee accounts. While institutional ownership exhibits a linear negative relationship, our findings on local individuals and foreign nominees differ greatly from previous studies in that their relationship with stock liquidity is non-monotonic. Apart from the widely-researched information asymmetry and trading effects, we find that liquidity is also driven by the largely ignored information competition channel. An important insight from our findings is that the large shareholdings by any particular investor group is detrimental to stock liquidity as they exacerbate information asymmetry, reduce the degree of competition and lower the level of trading activity.

Keywords

Stock liquidity; Information asymmetry; Information competition; Trading activity; Nominee account; Malaysia 

Effect of geographical diversification on informational efficiency in Malaysia

Journal Article
Suan Poh, Chee-Wooi Hooy and Kian-Ping Lim
Economics Bulletin, 37(1). 19-29
Publication year: 2017

Abstract

This study examines the effect of geographic diversification on informational efficiency. Four types of geographical diversification indicators are used to capture different degrees geographical diversification of a firm. By using panel data of more than 250 public listed firms in Malaysia across 11 industries for 8 years, most geographical diversification indicators show significant and positive relationship with local and global delay measures. For robustness test, this study investigates the biased result caused by unobserved time and firm effects by clustering the standard errors by firm, time and both dimensions, respectively. To further manifest the effect of investor recognition hypothesis, dummy of KLCI index is introduced as moderator to geographical diversification indicators and shows negative and significant relationship with global delay measure.

Keywords

Informational efficiency; Price delay; Geographical diversification; Malaysia

Stock market liberalisation and cost of equity: Firm-level evidence from Malaysia

Journal Article
Swee-Sim Foong and Kian-Ping Lim
Asian Academy of Management Journal of Accounting and Finance, USM Press, 12 (Suppl.), 19-42
Publication year: 2016

Abstract

This study extends the stock market liberalisation literature by conducting a firm-level analysis on the emerging economy of Malaysia. Using a finer measure of foreign ownership, we explore the association between liberalisation and cost of equity for public listed firms on Bursa Malaysia over the sample period of 2002-2009. We find strong support for our hypothesis that total foreign ownership is negatively and significantly associated with cost of equity. Further disaggregate analysis suggests foreign institutions that trade through direct accounts are driving the lower cost of equity. When the model is extended to include interaction term, we find that an effective board of directors further strengthens the negative relationship between foreign institutions and cost of equity. Our empirical results consistently support the corporate governance channel in which foreign institutions play an active monitoring role.

Keywords

Foreign ownership; Cost of equity; Investor heterogeneity; Corporate governance; Malaysia

Foreign investors and stock price efficiency: Thresholds, underlying channels and investor heterogeneity

Journal Article
Kian-Ping Lim, Chee-Wooi Hooy, Kwok-Boon Chang and Robert Brooks
North American Journal of Economics and Finance, Elsevier, 36, 1-28 [Lead Article]
Publication year: 2016

Abstract

This paper examines the relationship between foreign shareholding and stock price efficiency for Malaysian public listed firms over the 2002–2009 sample period. We use stock price delay as an inverse measure of price efficiency, and consider the speed of adjustment to local and global common factor information. The results show that foreign investors accelerate the incorporation of both types of common information into the prices of Malaysian stocks, mainly due to their superior skills in processing systematic market-wide factors. However, we find evidence of optimality in foreign shareholding, suggesting that the efficiency benefit disappears after foreign ownership exceeds a certain threshold level. Further analyses shed lights on the channels and moderating variables driving this non-monotonic relationship. Our disaggregate analysis on foreign investor heterogeneity shows that foreign investors who trade through nominee accounts are elite processors of public market-wide and firm-specific news in the Malaysian stock market.

Keywords

Financial liberalisation; Foreign investors; Price efficiency; Thresholds; Investor heterogeneity

 

Aggregate liquidity for Malaysian stock market: New indicators and time series properties

Journal Article
Ping-Xin Liew, Kian-Ping Lim and Kim-Leng Goh
International Journal of Economics & Management, UPM Press, 10(2), 297-319
Publication year: 2016

Abstract

This study constructs two liquidity indicators, “Closing Percent Quoted Spread” and “Closing Percent Quoted Spread Impact”, for all publicly listed firms on Bursa Malaysia over the 2000-2014 sample period. The raw firm-level daily liquidity values are averaged across months and then aggregated using equal- and value-weighted schemes to provide two Malaysian monthly aggregate liquidity indicators. Tracking the level of market liquidity over the last 15 years, all indicators consistently show that there is an obvious dry-up in liquidity in year 2008 when the bankruptcy of Lehman Brothers shattered confidence in the financial markets. Unlike the U.S. stock exchanges, there is no conclusive evidence to suggest that liquidity in the Malaysian market has improved over the sample period. However, in the short-term, there is evidence of seasonality in which the market is less liquid at year end as compared to the beginning of the year. Further structural break analysis indicates that the sharp liquidity changes in the Malaysian stock market are mainly driven by reactions to international events. When comparing with other commonly used liquidity proxies, the correlation analysis provides evidence in the Malaysian context that the turnover ratio is a poor indicator of liquidity.

Keywords

Aggregate liquidity; Malaysian stock market; Seasonality; Structural Break; Trend

Nonlinear predictability in G7 stock index returns

Journal Article
Kian-Ping Lim and Chee-Wooi Hooy
Manchester School, Wiley-Blackwell, 81(4), 620-637
Publication year: 2013

Abstract

This paper re-examines the persistence and source of non-linear predictability in the stock markets of G7 countries. Applying the Brock–Dechert–Scheinkman (BDS) test on autoregression (AR)-filtered returns in rolling estimation windows, we find evidence of local non-linear predictability in all the sampled stock markets. To identify the source, we apply the BDS test on AR-generalized autoregressive conditional heteroskedasticity (GARCH)-filtered returns in rolling windows. After accounting for conditional heteroskedasticity, we still find brief time periods with non-linear predictability in all markets, contradicting the weak-form efficient markets hypothesis.

Keywords

Nonlinear predictability; BDS test; Efficient markets hypothesis; Adaptive markets hypothesis; G7 stock market


Supplementary Materials

BDS Test in EViews

 

Is market integration associated with informational efficiency of stock markets?

Journal Article
Chee-Wooi Hooy and Kian-Ping Lim
Journal of Policy Modeling, Elsevier, 35(1), 29-44
Publication year: 2013

Abstract

This study addresses the question of whether a more integrated stock market is associated with a higher degree of informational efficiency. We employ the adjusted pricing error from an equilibrium international asset pricing model as a proxy for market integration. The aggregate country-level price delay serves as an inverse measure of informational efficiency, as it captures the relative speed with which each aggregate stock market reacts to global common information. Using data from 49 countries, we find robust evidence supporting the hypothesis that markets more integrated with the world are also more efficient, and this positive association is only significant in the sub-sample of emerging stock markets. The results provide additional insight on the factors facilitating the transmission of global information and yield important policy implications.

Keywords

Informational efficiency; Market integration; Financial liberalization; Price delay; Pricing error

 

Supplementary Materials

 

Are US stock index returns predictable? Evidence from automatic autocorrelation-based tests

Journal Article
Kian-Ping Lim, Weiwei Luo and Jae H. Kim
Applied Economics, Taylor and Francis, 45(8), 953-962
Publication year: 2013

Abstract

This article re-examines the evidence of return predictability for three major US stock indices using two recently developed data-driven tests, namely the automatic portmanteau Box–Pierce test and the wild bootstrapped automatic variance ratio test. In tracking the time variation of return predictability via rolling estimation window, we find that those periods with significant return autocorrelations can largely be associated with major exogenous events. Theoretically, the documented time varying nature of predictable patterns is consistent with the adaptive markets hypothesis.

Keywords

Autocorrelation test; Variance ratio test; Adaptive markets hypothesis; Evolving return predictability; US stock market

 

Supplementary Materials

R Code Written by Jae Kim

 

 

The weak-form efficiency of Asian stock markets: New evidence from generalized spectral martingale test

Journal Article
Kian-Ping Lim and Weiwei Luo
Applied Economics Letters, Taylor and Francis, 19(10), 905-908
Publication year: 2012

Abstract

The most appropriate approach to test for weak-form market efficiency is to examine whether the stock returns are Martingale Difference Sequence (MDS). However, the MDS tests have been largely ignored by previous studies, as the empirical analysis is dominated by Variance Ratio (VR) tests and Independent and Identically Distributed (IID)-based nonlinearity tests. This article re-examines the weak-form efficiency of 14 Asian stock markets using the generalized spectral martingale test. The result shows that all the return series are not MDSs, indicating the presence of return predictability and hence market inefficiency.

Keywords

Market efficiency; Return predictability; Martingale difference sequence; Asian stock markets

 

Supplementary Materials

R Code Written by Jae Kim

 

Trade openness and the informational efficiency of emerging stock markets

Journal Article
Kian-Ping Lim and Jae H. Kim
Economic Modelling, Elsevier, 28(5), 2228-2238
Publication year: 2011

Abstract

This paper examines the empirical link between trade openness and the informational efficiency of stock markets in 23 developing countries. Our fixed effects panel regression results document a significant negative relation between trade openness and stock return autocorrelations only when the de facto measure is used. On this basis, we argue that a greater level of de facto trade openness is associated with a higher degree of informational efficiency in these emerging stock markets because the former signals higher future firm profitability, and investors tend to react faster to information when there is less uncertainty about a firm’s future earnings or cash flows. Further analyses find no significant association between the extent of financial openness and the degree of informational efficiency.

Keywords

Trade openness; Financial openness; Informational efficiency; Return autocorrelations; Emerging stock markets

 

Supplementary Materials

KP 2010 Presentation Slides         R Code Written by Jae Kim

The evolution of stock market efficiency over time: A survey of the empirical literature

Journal Article
Kian-Ping Lim and Robert D. Brooks
Journal of Economic Surveys, Wiley-Blackwell, 25(1), 69-108
Publication year: 2011

Abstract

This paper provides a systematic review of the weak-form market efficiency literature that examines return predictability from past price changes, with an exclusive focus on the stock markets. Our survey shows that the bulk of the empirical studies examine whether the stock market under study is or is not weak-form efficient in the absolute sense, assuming that the level of market efficiency remains unchanged throughout the estimation period. However, the possibility of time-varying weak-form market efficiency has received increasing attention in recent years. We categorize these emerging studies based on the research framework adopted, namely non-overlapping sub-period analysis, time-varying parameter model and rolling estimation window. An encouraging development is that the documented empirical evidence of evolving stock return predictability can be rationalized within the framework of the adaptive markets hypothesis.

Keywords

 

Supplementary Materials

KP 2013 Presentation Slides       

 

Stock return predictability and the adaptive markets hypothesis: Evidence from century-long U.S. data

Journal Article
Jae H. Kim, Abul Shamsuddin and Kian-Ping Lim
Journal of Empirical Finance, Elsevier, 18(5), 868- 879
Publication year: 2011

Abstract

This paper provides strong evidence of time-varying return predictability of the Dow Jones Industrial Average index from 1900 to 2009. Return predictability is found to be driven by changing market conditions, consistent with the implication of the adaptive markets hypothesis. During market crashes, no statistically significant return predictability is observed, but return predictability is associated with a high degree of uncertainty. In times of economic or political crises, stock returns have been highly predictable with a moderate degree of uncertainty in predictability. We find that return predictability has been smaller during economic bubbles than in normal times. We also find evidence that return predictability is associated with stock market volatility and economic fundamentals.

Keywords

Economic bubbles; Economic crises; Adaptive markets hypothesis; Market efficiency; U.S. stock market

 

Supplementary Materials

R Code Written by Jae Kim

Why do emerging stock markets experience more persistent price deviations from a random walk over time? A country-level analysis

Journal Article
Kian-Ping Lim and Robert D. Brooks
Macroeconomic Dynamics, Cambridge University Press, 14(S1), 3-41 [Lead Article]
Publication year: 2010

Abstract

This paper employs the rolling bicorrelation test to measure the degree of nonlinear departures from a random walk for aggregate stock price indices of fifty countries over the sample period 1995–2005. We find that stock markets in economies with low per capita GDP in general experience more frequent price deviations than those in the high-income group. This clustering effect is not due to market liquidity or other structural characteristics, but instead can be explained by cross-country variation in the degree of private property rights protection. Our conjecture is that weak protection deters the participation of informed arbitrageurs, leaving those markets dominated by sentiment-prone noise traders whose correlated trading causes stock prices in emerging markets to deviate from the random walk benchmarks for persistent periods of time.

Keywords

Random walk; Degree of market efficiency; Determinants of market efficiency; Private property rights

 

The delay of stock price adjustment to information: A country-level analysis

Journal Article
Kian-Ping Lim and Chee-Wooi Hooy
Economics Bulletin, 30(2), 1609-1616
Publication year: 2010

Abstract

This study measures the speed with which the aggregate stock market in 49 countries responds to global market-wide public information. Our empirical results show that there are wide variations in the aggregate price delay values over time and across countries. Subsequent panel analysis confirms previous firm-level evidence that market size, trading volume, short sales restrictions and the degree of inevitability are significant determinants of price delay even at the country level.

Keywords

Informational efficiency; Speed of adjustment; Price delay; Aggregate stock market

Weak-form market efficiency and nonlinearity: Evidence from Middle East and African stock indices

Journal Article
Kian-Ping Lim
Applied Economics Letters, Taylor and Francis, 16(5), 519-522
Publication year: 2009

Abstract

This study examines the existence of nonlinear serial dependence in five stock markets in the Middle East and Africa. The results from the application of a battery of nonlinearity tests reveal that after removing all short-term linear dependence, the stock returns still contain predictable nonlinearities that contradict the unpredictable criterion of weak-form efficient markets hypothesis.

Keywords

Efficient market hypothesis; Nonlinearity; Return predictability; Middle East; Stock market

The weak-form efficiency of Chinese stock markets: Thin trading, nonlinearity and episodic serial dependencies

Journal Article
Kian-Ping Lim, Muzafar Shah Habibullah and Melvin J. Hinich
Journal of Emerging Market Finance, Sage, 8(2), 133-163
Publication year: 2009

Abstract

Motivated by the shortcomings of earlier Chinese efficiency studies, the present paper re-examines the weak-form efficiency of Shanghai and Shenzhen Stock Exchanges. Specifically, our adopted methodologies mitigate the confounding effect of thin trading on return autocorrelation, detect both linear and nonlinear serial dependencies in the adjusted returns series, and capture the persistence of dependency structures over time. The result shows that the adjusted returns series from both markets follow a random walk for long periods of time, only to be interspersed with brief periods of strong linear and/or nonlinear dependency structures. This suggests that there are certain time periods when new information is not fully reflected into stock prices. Another interesting finding is that the existence of serial dependencies in both the Shanghai and Shenzhen Stock Exchanges follows one another closely after October 1997. It indicates that both markets respond in a similar way to influences from political, economic, social and institutional changes.

Keywords

Nonlinearity; Thin trading; Market efficiency; China; Stock market

 

Supplementary Materials

Purchasing power parity in Asian economies: Further evidence from rank tests for cointegration

Journal Article
Venus Khim-Sen Liew, Hock-Ann Lee and Kian-Ping Lim
Applied Economics Letters, Taylor and Francis, 16(1), 51-54
Publication year: 2009

Abstract

The finding of nonlinear cointegration between Asian exchange rates with the corresponding relative prices and aggregate price levels based on Breitung’s (2001) nonparametric rank tests reinforces previous validations of purchasing power parity (PPP) by the parametric testing procedures. Hence, the long-run Asian exchange rates are in equilibrium with the relevant fundamentals as suggested by the PPP hypothesis.

Keywords

Purchasing power parity; Exchange rates; Cointegration; Nonlinearity; Asian economies

Price limits and stock market efficiency: Evidence from rolling bicorrelation test statistic

Journal Article
Kian-Ping Lim and Robert D. Brooks
Chaos, Solitons & Fractals, Elsevier, 40(3), 1271-1276
Publication year: 2009

Abstract

Using the rolling bicorrelation test statistic, the present paper compares the efficiency of stock markets from China, Korea and Taiwan in selected sub-periods with different price limits regimes. The statistical results do not support the claims that restrictive price limits and price limits per se are jeopardizing market efficiency. However, the evidence does not imply that price limits have no effect on the price discovery process but rather suggesting that market efficiency is not merely determined by price limits.

Keywords

Nonlinearity; Bicorrelation; Return predictability; Price limits; Stock markets

 

Supplementary Materials

On the validity of conventional statistical tests given evidence of nonsynchronous trading and nonlinear dynamics in returns generating process: A further note

Journal Article
Kian-Ping Lim and Robert D. Brooks
Applied Economics Letters, Taylor and Francis, 16(6), 649-652
Publication year: 2009

Abstract

Given the growing empirical evidence that returns predictability follows an evolutionary path, it calls into question not only the usefulness of conventional statistical tests of market efficiency as highlighted by Saadi et al. (2006), but also the adequacy of the efficient markets hypothesis to explain observed market dynamics.

Keywords

Efficient market hypothesis; Adaptive market hypothesis; Return predictability; Stock market

Is there any international diversification benefits in ASEAN stock markets?

Journal Article
Hock-Ann Lee, Kian-Ping Lim and Venus Khim-Sen Liew
Economics Bulletin, 29(1), 393-407
Publication year: 2009

Abstract

This study finds that there is a common force which brings all the five ASEAN stock markets together in the long run by the nonparametric tests. This suggests that shocks from any of these five markets may spillover to the other markets in the same region. The recent Asian financial crisis bears a good testimony to this ‘contagion effect’. Subsequently, there would be no long run gain from international portfolio diversification. Specifically, investors with long run horizons may not benefit from an investment made across the countries in this ASEAN region. One possible explanation for this intra-ASEAN stock markets integration is their strong economic ties, especially intra-ASEAN trade and investment that has indirectly linked their stock indices.

Keywords

Market integration; Diversification; Nonlinearity; ASEAN; Stock market

Efficiency tests of the UK financial futures markets and the impact of electronic trading systems: A note on relative market efficiency

Journal Article
Kian-Ping Lim
Applied Economics Letters, Taylor and Francis, 16(11), 1129- 1132
Publication year: 2009

Abstract

The literature on weak-form efficient market hypothesis (EMH) has experienced a phenomenal growth over the past few decades, with the empirical framework mostly directed towards testing the absolute version of market efficiency. Evans (2006) represents a small amount of studies that addressed the relative efficiency of financial markets. The present paper discusses the limitations of absolute market efficiency and surveys some measures proposed for assessing relative efficiency in extant literature.

Keywords

Efficient market hypothesis; Absolute efficiency; Relative efficiency

Are Chinese stock markets efficient? Further evidence from a battery of nonlinearity tests

Journal Article
Kian-Ping Lim and Robert D. Brooks
Applied Financial Economics, Taylor and Francis, 19(2), 147-155
Publication year: 2009

Abstract

Given that the efficiency of the Chinese stock markets was empirically examined in extant literature using statistical tests that are designed to uncover linear correlations of price changes, the obtained statistical inferences of efficiency/inefficiency are on very shaky grounds as highlighted in a recent article by Saadi et al. (2006). Motivated by this concern, the present article re-examines the efficiency of the A- and B-shares markets in Shanghai and Shenzhen Stock Exchanges (SHSE and SZSE) using a battery of nonlinearity tests. The empirical investigation reveals strong evidence of nonlinear serial dependence in the underlying returns generating processes for all indices even after removing linear serial correlations from the data, hence, contradicting the unpredictable criterion of weak-form efficient market hypothesis. Theoretically, these results are not surprising given the fact that investors in the Chinese stock markets trade like noise traders, who purely speculate and treat the market like a casino.

Keywords

Market efficiency; Return predictability; Nonlinearity; China; Stock market

Time series test of nonlinear convergence and transitional dynamics

Journal Article
Terence Tai-Leung Chong, Melvin J. Hinich, Venus Khim-Sen Liew and Kian-Ping Lim
Economics Letters, Elsevier, 100(3), 337-339
Publication year: 2008

Abstract

This paper revisits the income convergence hypothesis by using the nonlinear unit root test of Kapetanios et al. [Kapetanios, G., Shin, Y. and A. Snell, 2003. Testing for a unit root in the nonlinear STAR framework. Journal of Econometrics 112, 359–379.]. Out of the 12 OECD income gaps in which nonlinearity has been detected, two cases of long-run converging and four cases of catching up are found.

Keywords

OECD; Long-run convergence; Catching up; Nonlinear unit root test

Sectoral impact of shocks: Empirical evidence from the Malaysian stock market

Journal Article
Kian-Ping Lim
Applied Financial Economics Letters, Taylor and Francis, 4(1), 35-39
Publication year: 2008

Abstract

The present study adopts the framework of Lim et al. (2006) who conjectured that the existence of nonlinear serial dependencies is due to shocks that unsettled the market and caused large deviations from equilibrium. Specifically, this article extends the investigation to shed further light on whether different economic sectors of the Malaysian stock market are subjected to the same shocks effects. The results reveal that the Russian crisis, negative economic outlook, unorthodox capital control measures, increased political tension, uncertainty over Central Limit Order Book issue, and the imposition of repatriation levy, have sent shock waves throughout the domestic stock market.

Keywords

Nonlinearity; Bicorrelation; Event study; Stock market; Malaysia

 

 

Sectoral efficiency of the Malaysian stock market and the impact of the Asian financial crisis

Journal Article
Kian-Ping Lim
Studies in Economics and Finance, Emerald Group Publishing, 25(3), 196-208
Publication year: 2008

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Nonlinear serial dependence and the weak-form efficiency of Asian emerging stock markets

Journal Article
Kian-Ping Lim, Robert D. Brooks and Melvin J. Hinich
Journal of International Financial Markets, Institutions and Money, Elsevier, 18(5), 527-544
Publication year: 2008

Abstract

The objective of this paper is to re-examine the weak-form efficiency of 10 Asian emerging stock markets. Using a battery of nonlinearity tests, the statistical results reveal that all the returns series still contain predictable nonlinearities even after removing linear serial correlation from the data. The next stage of sub-sample analysis using the Hinich [Hinich, M., 1996. Testing for dependence in the input to a linear time series model. Journal of Nonparametric Statistics 6, 205–221] bicorrelation test shows that the 10 Asian series follow a pure noise process for long periods of time, only to be interspersed with brief periods of strong nonlinear dependence. The exploratory investigation found that the cross-country differences in nonlinear departure from market efficiency can be explained by market size and trading activity, while the transient burst of nonlinear periods in each individual market can be attributed largely to the occurrence of economic and political events.

Keywords

Predictability; Nonlinearity; Market efficiency; Emerging markets; Asia

Financial crisis and stock market efficiency: Empirical evidence from Asian countries*

Journal Article
Kian-Ping Lim, Robert D. Brooks and Jae H. Kim
International Review of Financial Analysis, Elsevier, 17(3), 571-591
Publication year: 2008

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Abstract

This paper empirically investigates the effects of the 1997 financial crisis on the efficiency of eight Asian stock markets, applying the rolling bicorrelation test statistics for the three sub-periods of pre-crisis, crisis, and post-crisis. On a country-by-country basis, the results demonstrate that the crisis adversely affected the efficiency of most Asian stock markets, with Hong Kong being the hardest hit, followed by the Philippines, Malaysia, Singapore, Thailand and Korea. However, most of these markets recovered in the post-crisis period in terms of improved market efficiency. Given that the evidence of nonlinear serial dependencies indicates equilibrium deviation resulted from external shocks, the present findings of higher inefficiency during the crisis are not surprising as in the chaotic financial environment at that time, investors would overreact not only to local news, but also to news originating in the other markets, especially when the news events were adverse.

Keywords

Market efficiency; Asian crisis; Stock market; Nonlinear serial dependence; Bicorrelation

Ranking of efficiency for stock markets: A nonlinear perspective

Journal Article
Kian-Ping Lim
Physica A: Statistical Mechanics and Its Applications, Elsevier, 376, 445-454
Publication year: 2007

Abstract

The present paper demonstrates, via a rolling sample approach, that the stylized fact of nonlinear dependence in stock returns is quite localized in time, suggesting that market efficiency evolves over time. Given that the rolling sample framework is able to detect periods of efficiency/inefficiency, the relative efficiency of stock markets can easily be assessed by comparing the total time windows these markets exhibit significant nonlinear serial dependence. It was found that the US market is the most efficient while Argentine is at the end of the ranking.

Keywords

Nonlinear dependence; Bicorrelation; Market efficiency

Nonlinear mean reversion in stock prices: Evidence from Asian markets

Journal Article
Kian-Ping Lim and Venus Khim-Sen Liew
Applied Financial Economics Letters, Taylor and Francis, 3(1), 25-29
Publication year: 2007

Abstract

Utilizing the standard linearity test of Luukkonen et al. (1988), the linear nature of all the Asian stock indices has been formally rejected. This finding warrants use of the nonlinear stationary test of Kapetanois et al. (2003), which is also constructed in the STAR framework, to investigate the mean reverting property of the stock prices series. As a whole, this study not only found convincing evidence of a nonlinear mean reverting pattern in all the Asian stock indices, but also demonstrates the risk of drawing the wrong inferences on mean reversion when the ADF test is applied to data governed by nonlinearity.

Keywords

Nonlinearity; Mean reversion; Smooth transition autoregressive (STAR); Asian; Stock market

Statistical inadequacy of GARCH models for Asian stock markets: Evidence and implications

Journal Article
Kian-Ping Lim, Melvin J. Hinich and Venus Khim-Sen Liew
Journal of Emerging Market Finance, Sage, 4(3), 263- 279
Publication year: 2005

Abstract

This study employs the Hinich portmanteau bicorrelation test (Hinich 1996; Hinich and Patterson 1995) as a diagnostic tool to determine the adequacy of Generalised Autoregressive Conditional Heteroscedasticity (GARCH) models for eight Asian stock markets. The bicorrelation test results demonstrate that this type of model cannot provide an adequate characterisation for the underlying process of all the selected Asian stock markets. Further investigation using the windowed test procedure reveals that the violation of the covariance stationarity assumption as required by the GARCH process is due to the presence of transient epochs of dependencies in the data. The inadequacy of GARCH models has strong implications for the pricing of stock index options, portfolios selection, development of optimal hedging techniques and risk management.

Keywords

GARCH; Non-stationarity; Data generating process; Bicorrelation; Asian stock markets

Non-linear market behavior: Events detection in the Malaysian stock market

Journal Article
Kian-Ping Lim and Melvin J. Hinich
Economics Bulletin, 7(6), 1-5
Publication year: 2005

Abstract

This paper advocates a reverse from of event studies that is data−dependent to determine endogeneously the events that trigger non−linear market behavior. Using the Malaysian stock market as our case study, coupled with the ‘windowing’ approach proposed by Hinich and Patterson (1995), the present study is able to identify major political and economic events that contributed to the short bursts of non−linear behavior. The present framework can be extended to individual firm to examine the adjustment of its stock price to firm−specific events, which will provide deeper insight into issues on corporate finance.

Keywords

Nonlinearity; Event study; Bicorrelation; Malaysia; Stock market

Income divergence? Evidence of non-linearity in the East Asian economies

Journal Article
Venus Khim-Sen Liew and Kian-Ping Lim
Economics Bulletin, 15(1), 1-7
Publication year: 2005

Abstract

This study examines the issue of income convergence in the East−Asian economies from the non−linear point of view. It is shown in this study that the income gaps between Japan and the rest of the East−Asian economies exhibit nonlinearities. It is further shown that after taking non−linearity into consideration, China, Indonesia, Malaysia, Thailand and the Philippines exhibit divergence behaviour with respect to Japan’s income, whereas Hong Kong, Korea, Taiwan and Singapore show otherwise.

Keywords

Income convergence; Nonlinearity; Japan; East Asia

Income disparity between Japan and ASEAN-5 economies: Converge, catching up or diverge?

Journal Article
Hock-Ann Lee, Kian-Ping Lim and M. Azali
Economics Bulletin, 6(13), 1-8
Publication year: 2005

Abstract

The objective of this study is to empirically examine the income disparity between Japan and each of the five major economies of South East Asia (ASEAN−5) during the period of 1960 to 1997, utilizing the popular augmented Dickey−Fuller (ADF) unit root test. The results provide evidence of income divergence between Japan and each of the ASEAN−5 economies. To avoid the problem associated with structural break, this study proceeds with the jointly crash and changes in trend model proposed by Zivot and Andrews (1992), and is able to obtain evidence of long run income convergence between the Japanese and Singaporean economies. As for the rest of the four ASEAN countries− Indonesia, Malaysia, the Philippines and Thailand, the earlier results of income divergence remain valid and hence suggest that it would be a more realistic and urgent goal to narrow the income gap among these five core economies of ASEAN.

Keywords

Income disparity; Unit root test; Structural break; Japan; ASEAN-5

Exchange rate−relative price nonlinear cointegration relationship in Malaysia

Journal Article
Venus Khim-Sen Liew, Kian-Ping Lim, Evan Lau and Chee-Keong Choong
Economics Bulletin, 6(11), 1-11
Publication year: 2005

Abstract

The finding of exchange rate–relative price nonlinear cointegration relationship in Malaysia, among others, suggests that nonlinear Purchasing Power Parity (PPP) equilibrium may be regarded as reference point in judging the short run misalignment of the Ringgit currency and thereby deducing effective policy actions. Moreover, economists who wish to extend the simple PPP exchange rate model into the more complicated monetary exchange models may do so comfortably, at least in the text of Malaysia. Nonetheless, such attempt should be tailored in a nonlinear way to suit the nonlinear characteristic of exchange rate behaviour.

Keywords

Nonlinearity; Cointegration; Exchange rate; Purchasing power parity; Malaysia

Cross-temporal universality of non-linear dependencies in Asian stock markets

Journal Article
Kian-Ping Lim and Melvin J. Hinich
Economics Bulletin, 7(1), 1-6
Publication year: 2005

Abstract

This study utilizes the Hinich portmanteau bicorrelation test in conjunction with the windowed testing procedure to examine the cross−temporal universality of non−linear dependencies in the returns series for Asian stock market indices. As a whole, the detected non−linear dependencies do not appear to be persistent or stable across time for all the stock markets. In particular, the underlying process is of a switching type, with the pure noise process from time to time switches to a non−linear dependent stochastic process for some unknown length of time, and then switches back to pure−noise. This provides a plausible explanation for the disappointing forecasting performance of many non−linear models, as these existing models do not take note of the episodic transient nature of the non−linear dependency structures.

Keywords

Nonlinearity; Predictability; Bicorrelation; Asian; Stock markets

On Singapore dollar–U.S. dollar and the purchasing power parity

Journal Article
Venus Khim-Sen Liew, Ahmad Zubaidi Baharumshah and Kian-Ping Lim
Singapore Economic Review, World Scientific Publishing, 49(1), 71-84
Publication year: 2004

Abstract

This study re-examines the validity of the relationship between the Singapore dollar–U.S. dollar exchange rate and relative prices using the latest econometric methodologies that account for non-linearity. Among others, this study finds Exponential Smooth Transition Autoregressive (ESTAR)-type non-linear mean-reverting adjustment process of the nominal Singapore dollar–U.S. dollar rate towards the consumer price index ratio. Unlike previous findings of a linear cointegration relationship between the nominal Singapore dollar–U.S. dollar exchange rate and consumer price index ratio, this study shows that the relationship is in fact non-linear in nature. The major economic implications of our findings are: (1) policy makers need to take non-linearity into consideration in their policy decisions; (2) the Monetary Authority of Singapore (MAS) is able to maintain the macroeconomic equilibrium despite the authority’s strong dollar policy; and (3) one should keep track of Singapore’s monetary policy and other innovations in aggregate demand in order to closely monitor the movement of the Singapore exchange rate.

Keywords

Exchange rates; Non-linearity; Purchasing power parity; Exponential smooth transition autoregressive (ESTAR) model; Singapore

The inadequacy of linear autoregressive model for real exchange rates: Empirical evidence from Asian economies

Journal Article
Venus Khim-Sen Liew, Terence Tai-Leung Chong and Kian-Ping Lim
Applied Economics, Taylor and Francis, 35(12), 1387-1392
Publication year: 2003

Abstract

Utilizing the formal linearity test of Luukkonen, Saikkonen and Teräsvirta (Biometrika, 75, 491-499, 1998) as diagnostic tool, the empirical finding suggests that the linear autoregressive (AR) model is inadequate in describing the real exchange rates behaviour of 11 Asian economies. It is noted that the conventional battery of diagnostic tests is capable of identifying the inadequacy of the linear model in only three of these series. Moreover, the linearity nature of this behaviour has been formally rejected in favour of the non-linear smooth transition autoregressive (STAR) model. The finding of non-linearity in the data generating process of these real exchange rates warrants that the use of linear framework in empirical modelling and statistical testing procedures in the field of exchange rates may lead to an inappropriate policy conclusions.

Keywords

Exchange rates; Non-linearity; Data generating process; Smooth transition autoregressive (STAR) model; Asia