This paper investigates 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 US), using monthly data spanning December 1987 to December 2005. Both the Engle-Granger two-step procedure (assuming no structural breaks) and the Gregory and Hansen (1996) 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 US. We also found empirical evidence 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.
Available at: http://works.bepress.com/abbas/30/