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System identification in noisy data environments: An application to six Asian stock markets

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  • Los, Cornelis A.

Abstract

This paper analyzes the systematic relationship between the stock market valuations, the nominal GDPs and the interest rates of six Asian countries, using not 'single equation regression,' but an alternative methodology based on complete, multidirectional, least squares projections. We compare the results with the spectral analysis of the information matrices and determine the noise levels. The objective is to extract the multidimensional economic system structures from the noisy empirical observations. This complete methodology sharply contrasts with the incomplete methodology of Fama (1990), Schwert (1990), etc., who presume planal relations, fit them to the multidimensional data by only one prejudiced unidirectional projection, thereby ignoring between 75% - 92% of the available covariance information and not publishing the absolute majority of all possible model projections. The results in this paper show that the analyzed countries are better analyzed using such complete multidirectional LS projections, even though the analysis is combinatorially much more complex. All six Asian financial-economic systems are high data noise environments, in which it is very difficult to separate the systematic signals from the noise. Because of these high noise levels, spectral analysis is very unreliable. We identify Taiwan's stock market, economy and financial market to be rationally coherent. In contrast, Malaysia, Singapore, Philippines and Indonesia show only partially coherent systems, while no coherent system can be identified among Japan's data.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 30 (2006)
Issue (Month): 7 (July)
Pages: 1997-2024

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Handle: RePEc:eee:jbfina:v:30:y:2006:i:7:p:1997-2024

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  1. Fama, Eugene F, 1981. "Stock Returns, Real Activity, Inflation, and Money," American Economic Review, American Economic Association, vol. 71(4), pages 545-65, September.
  2. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
  3. Ross, Stephen A., 1976. "The arbitrage theory of capital asset pricing," Journal of Economic Theory, Elsevier, vol. 13(3), pages 341-360, December.
  4. Kholdy, Shady & Sohrabian, Ahmad, 1995. "Testing for the relationship between nominal exchange rates and economic fundamentals," Global Finance Journal, Elsevier, vol. 6(2), pages 121-134.
  5. Schwert, G William, 1990. " Stock Returns and Real Activity: A Century of Evidence," Journal of Finance, American Finance Association, vol. 45(4), pages 1237-57, September.
  6. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, vol. 37(3), pages 424-38, July.
  7. Fama, Eugene F, 1990. " Stock Returns, Expected Returns, and Real Activity," Journal of Finance, American Finance Association, vol. 45(4), pages 1089-1108, September.
  8. Klepper, Steven & Leamer, Edward E, 1984. "Consistent Sets of Estimates for Regressions with Errors in All Variables," Econometrica, Econometric Society, vol. 52(1), pages 163-83, January.
  9. Schwert, G. William, 1987. "Effects of model specification on tests for unit roots in macroeconomic data," Journal of Monetary Economics, Elsevier, vol. 20(1), pages 73-103, July.
  10. Bittlingmayer, George, 1992. " Stock Returns, Real Activity, and the Trust Question," Journal of Finance, American Finance Association, vol. 47(5), pages 1701-30, December.
  11. Canova, Fabio & De Nicolo', Gianni, 1995. "Stock returns and real activity: A structural approach," European Economic Review, Elsevier, vol. 39(5), pages 981-1015, May.
  12. Gallinger, George W, 1994. "Causality Tests of the Real Stock Return-Real Activity Hypothesis," Journal of Financial Research, Southern Finance Association & Southwestern Finance Association, vol. 17(2), pages 271-88, Summer.
  13. Lee, Bong-Soo, 1992. " Causal Relations among Stock Returns, Interest Rates, Real Activity, and Inflation," Journal of Finance, American Finance Association, vol. 47(4), pages 1591-603, September.
  14. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
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