Volatility of Stock Price and Causality Effects Among Four Major Stock Markets in ASEAN Countries

Stock price volatility is an indicator which often used by traders to find changes in market trends. The volatility of stock price plays an essential role in portfolio management, capital budgeting, decision making and policy-making. This research will examine the evidence on stock price volatility and identify the causal relationship between four stock markets in ASEAN by analysing the daily data of the stock index market of Indonesia (JKSE), Malaysia (KLCI), Thailand (SET), and Singapore (STI) for eight years spanning from January 2005 to December 2012.Using the GARCH Model, the research shows that there is evidence on stock price volatility before, during, and after economic recession in Indonesia, Malaysia, Thailand, and Singapore. Results from Granger Causality Model show that bidirectional causality holds for only in the case of Malaysia and Singapore. Besides, unidirectional causal relationships happen from Malaysia stock index market to Indonesia, and from Indonesia stock index market to Thailand. Granger Model also shows that there are no reciprocal relationships between the volatility of stock market in Indonesia and Singapore, Malaysia and Thailand, as well as Singapore and Thailand. These findings could provide a better guide for investors to diverse portfolio in order to minimize the risk and maximize the yield of investment. In addition, this research is also expected to give policy makers an insight on the growing linkages among regional stock markets in ASEAN.

TABLE OF CONTENTS

DECLARATION ................................................................................................... ii

ABSTRACT .......................................................................................................... iii

ABSTRAK ............................................................................................................. iv

ACKNOWLEDGEMENT ......................................................................................v

LIST OF TABLES ............................................................................................... vii

LIST OF FIGURES ............................................................................................. vii

LIST OF ABBREVIATIONS ............................................................................. viii

CHAPTER 1: INTRODUCTION...........................................................................1

1.1 Research Backgrounds ..............................................................................................1

1.2 Problem Statement ....................................................................................................4

1.3 Research Objectives ..................................................................................................5

1.4 Significance of Study .................................................................................................6

1.5 Summary ...................................................................................................................7

CHAPTER 2: LITERATURE REVIEW ...............................................................8

2.1 Introduction ..............................................................................................................8

2.2 Stock Market and Economic Performance in ASEAN .................................................9

2.3 Conceptual Theories ................................................................................................ 10

2.3.1 Volatility Definition and Models ...................................................................... 10

2.3.2 Causality Effects .............................................................................................. 15

2.4 Conceptual Framework ........................................................................................... 17

2.5 Hypothesis ............................................................................................................... 19

2.6 Research Gap of the Study ....................................................................................... 21

2.7 Summary ................................................................................................................. 22

CHAPTER 3: RESEARCH DESIGN AND METHODOLOGY ........................ 23

3.1 Introduction ............................................................................................................ 23

3.2 Research Methods ................................................................................................... 24

3.3 Sampling ................................................................................................................. 26

3.4 Techniques of Data Analysis .................................................................................... 27

3.4.1 Return Values Measurement ............................................................................ 27

3.4.2 Volatility Measurement .................................................................................... 28

3.4.3 Causality Effect Measurement.......................................................................... 30

3.5 Summary ................................................................................................................. 31

CHAPTER 4: RESULTS AND DISCUSSION .................................................... 32

4.1 Introduction ............................................................................................................ 32

4.2 Return of Stock Market ............................................................................................ 32

4.3 Volatility of Stock Market ........................................................................................ 35

4.4 Causality Relationship between Each Stock Market ................................................. 40

4.5 Summary of Results ................................................................................................. 42

CHAPTER 5: CONCLUSION AND RECOMMENDATION ............................ 43

5.1 Conclusion .............................................................................................................. 43

5.2 Limitation of Study and Recommendation ..................................................... 45

REFERENCES ..................................................................................................... 46

APPENDICES ....................................................................................................... 49