This purpose of this paper is to investigate the existence of cointegration and causality between the stock market price indices of Thailand and its major trading partners (Australia, Hong Kong, Indonesia, Japan, Korea, Malaysia, the Philippines, Singapore, Taiwan, the UK and the USA), using monthly data spanning December 1987 to December 2005.
This paper used both the Engle‐Granger two‐step procedure (assuming no structural breaks) and the Gregory and Hansen test (allowing for one structural break) provide no evidence of a long‐run relationship between the stock prices of Thailand and these countries.
Based on the empirical results obtained from these two residual‐based cointegration tests, potential long‐run benefits exist from diversifying the investment portfolios internationally to reduce the associated systematic risks across countries. However, in the short‐run, three unidirectional Granger causalities run from the stock returns of Hong Kong, the Philippines and the UK to those of Thailand, pair‐wise. Furthermore, there are two unidirectional causalities running from the stock returns of Thailand to those of Indonesia and the USA. Empirical evidence was also found of bidirectional Granger causality, suggesting that the stock returns of Thailand and three of its neighbouring countries (Malaysia, Singapore and Taiwan) are interrelated.
No previous study examines the possibility that the pair‐wise long‐run relationship between the stock prices of Thailand and those of both emerging and developed markets may have been subject to a structural break.
