IDEAS home Printed from
MyIDEAS: Login to save this article or follow this journal

Testing for cointegration with threshold effect between stock prices and exchange rates in Japan and Taiwan

  • Yau, Hwey-Yun
  • Nieh, Chien-Chung
Registered author(s):

    This paper empirically investigates the exchange rate effects of the New Taiwan dollar against the Japanese Yen (NTD/JPY) on stock prices in Japan and Taiwan from January 1991 to Mach 2008. Our study employs the newly threshold error-correction model (TECM) elaborated by Enders and Granger [Enders, W., Granger, C.W.F., 1998. Unit-root tests and asymmetric adjustment with an example using the term structure of interest rates. Journal of Business Economics & Statistics 16, 304-311] and Enders and Siklos [Enders, W., Siklos, P.L., 2001. Cointegration and threshold adjustment. Journal of Business Economics & Statistics 19, 166-176], assuming the nature of the relationship between the variables is on the basis of non-linearity. The empirical evidence suggests that there is a long-run equilibrium relationship between NTD/JPY and the stock prices of Japan and Taiwan during the time period investigated. However, an asymmetric threshold cointegration relationship only exists in Taiwan's financial market. Furthermore, we extend our research by taking into account the effect of the U.S. exchange rate specifically on Taiwan's financial market. This research also finds a long-term equilibrium and asymmetric causal relationships between NTD/USD and the stock prices of Taiwan. In addition, the results of TECM Granger-Causality tests show that no short-run causal relationship exists between the two financial assets considered for both countries' cases. However, in the long run a positive causal relationship running from either the Japan or U.S. exchange rate to the stock prices of Taiwan strongly argues for the traditional approach.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL:
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

    Article provided by Elsevier in its journal Japan and the World Economy.

    Volume (Year): 21 (2009)
    Issue (Month): 3 (August)
    Pages: 292-300

    in new window

    Handle: RePEc:eee:japwor:v:21:y:2009:i:3:p:292-300
    Contact details of provider: Web page:

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

    as in new window
    1. Granger, Clive W. J. & Huangb, Bwo-Nung & Yang, Chin-Wei, 2000. "A bivariate causality between stock prices and exchange rates: evidence from recent Asianflu," The Quarterly Review of Economics and Finance, Elsevier, vol. 40(3), pages 337-354.
    2. Prasad, Anita Mehra & Rajan, Murli, 1995. "The role of exchange and interest risk in equity valuation: A comparative study of international stock markets," Journal of Economics and Business, Elsevier, vol. 47(5), pages 457-472, December.
    3. Nieh, Chien-Chung & Lee, Cheng-Few, 2001. "Dynamic relationship between stock prices and exchange rates for G-7 countries," The Quarterly Review of Economics and Finance, Elsevier, vol. 41(4), pages 477-490.
    4. Serena Ng & Pierre Perron, 2001. "LAG Length Selection and the Construction of Unit Root Tests with Good Size and Power," Econometrica, Econometric Society, vol. 69(6), pages 1519-1554, November.
    5. Elyas Elyasiani & Iqbal Mansur, 2005. "The Association Between Market and Exchange Rate Risks and Accounting Variables: A GARCH Model of the Japanese Banking Institutions," Review of Quantitative Finance and Accounting, Springer, vol. 25(2), pages 183-206, September.
    6. Whitney K. Newey & Kenneth D. West, 1994. "Automatic Lag Selection in Covariance Matrix Estimation," Review of Economic Studies, Oxford University Press, vol. 61(4), pages 631-653.
    7. Doukas, John & Hall, Patricia H. & Lang, Larry H. P., 1999. "The pricing of currency risk in Japan," Journal of Banking & Finance, Elsevier, vol. 23(1), pages 1-20, January.
    8. Lo, Ming Chien & Zivot, Eric, 2001. "Threshold Cointegration And Nonlinear Adjustment To The Law Of One Price," Macroeconomic Dynamics, Cambridge University Press, vol. 5(04), pages 533-576, September.
    9. Kwiatkowski, D. & Phillips, P.C.B. & Schmidt, P., 1990. "Testing the Null Hypothesis of Stationarity Against the Alternative of Unit Root : How Sure are we that Economic Time Series have a Unit Root?," Papers 8905, Michigan State - Econometrics and Economic Theory.
    10. Dropsy, Vincent & Nazarian-Ibrahimi, Fatemeh, 1994. "Macroeconomic policies, exchange rate regimes and national stock markets," International Review of Economics & Finance, Elsevier, vol. 3(2), pages 195-220.
    11. Issam Abdalla & Victor Murinde, 1997. "Exchange rate and stock price interactions in emerging financial markets: evidence on India, Korea, Pakistan and the Philippines," Applied Financial Economics, Taylor & Francis Journals, vol. 7(1), pages 25-35.
    12. Robert B. Durand & Koh Sze Kee & Iain Watson, 2001. "Who Moved Asian-Pacific Stock Markets? A Further Consideration Of The Impact of the US and Japan," Australian Journal of Management, Australian School of Business, vol. 26(2), pages 125-145, December.
    13. Smith, C. E., 1992. "Stock markets and the exchange rate: A multi-country approach," Journal of Macroeconomics, Elsevier, vol. 14(4), pages 607-629.
    14. Engle, Robert & Granger, Clive, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 39(3), pages 106-135.
    15. Balke, Nathan S & Fomby, Thomas B, 1997. "Threshold Cointegration," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(3), pages 627-45, August.
    16. Siklos, P.L. & Granger, C.W.J., 1997. "Regime Sensitive Cointegration with an Application to Interest rate Parity," Working Papers 97-5, Wilfrid Laurier University, Department of Economics.
    17. MacKinnon, James G, 1996. "Numerical Distribution Functions for Unit Root and Cointegration Tests," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(6), pages 601-18, Nov.-Dec..
    18. Choi, Jongmoo Jay & Hiraki, Takato & Takezawa, Nobuya, 1998. "Is Foreign Exchange Risk Priced in the Japanese Stock Market?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 33(03), pages 361-382, September.
    19. Angelos Kanas, 2000. "Volatility Spillovers Between Stock Returns and Exchange Rate Changes: International Evidence," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 27(3-4), pages 447-467.
    20. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-72, June.
    21. Richard A. Ajayi & Mbodja Mougouė, 1996. "On The Dynamic Relation Between Stock Prices And Exchange Rates," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 19(2), pages 193-207, 06.
    22. Jia He & Lilian K. Ng, 1998. "The Foreign Exchange Exposure of Japanese Multinational Corporations," Journal of Finance, American Finance Association, vol. 53(2), pages 733-753, 04.
    23. Bodnar, Gordon M. & Gentry, William M., 1993. "Exchange rate exposure and industry characteristics: evidence from Canada, Japan, and the USA," Journal of International Money and Finance, Elsevier, vol. 12(1), pages 29-45, February.
    24. Wu, Jyh-Lin, 1997. "Foreign Exchange Market Efficiency and Structural Instability: Evidence from Taiwan," Journal of Macroeconomics, Elsevier, vol. 19(3), pages 591-607, July.
    25. Tetsushi Homma & Yoshiro Tsutsui & Uri Benzion, 2005. "Exchange rate and stock prices in Japan," Applied Financial Economics, Taylor & Francis Journals, vol. 15(7), pages 469-478.
    26. Hansen, Bruce E. & Seo, Byeongseon, 2002. "Testing for two-regime threshold cointegration in vector error-correction models," Journal of Econometrics, Elsevier, vol. 110(2), pages 293-318, October.
    27. Kapetanios, George & Shin, Yongcheol & Snell, Andy, 2003. "Testing for a unit root in the nonlinear STAR framework," Journal of Econometrics, Elsevier, vol. 112(2), pages 359-379, February.
    28. Caporale, Guglielmo Maria & Pittis, Nikitas & Spagnolo, Nicola, 2002. "Testing for Causality-in-Variance: An Application to the East Asian Markets," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 7(3), pages 235-45, July.
    29. Dolado, Juan J & Jenkinson, Tim & Sosvilla-Rivero, Simon, 1990. " Cointegration and Unit Roots," Journal of Economic Surveys, Wiley Blackwell, vol. 4(3), pages 249-73.
    30. Qian Sun & Wilson H.S. Tong, 2000. "The Effect Of U.S. Trade Deficit Announcements On The Stock Prices Of U.S. And Japanese Automakers," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 23(1), pages 15-43, 03.
    31. Yau, Hwey-Yun & Nieh, Chien-Chung, 2006. "Interrelationships among stock prices of Taiwan and Japan and NTD/Yen exchange rate," Journal of Asian Economics, Elsevier, vol. 17(3), pages 535-552, June.
    32. Enders, Walter & Falk, Barry, 1998. "Threshold-autoregressive, median-unbiased, and cointegration tests of purchasing power parity," International Journal of Forecasting, Elsevier, vol. 14(2), pages 171-186, June.
    33. Taylor, Alan M, 2001. "Potential Pitfalls for the Purchasing-Power-Parity Puzzle? Sampling and Specification Biases in Mean-Reversion Tests of the Law of One Price," Econometrica, Econometric Society, vol. 69(2), pages 473-98, March.
    34. Enders, Walter & Hurn, Stan, 1994. "Theory and Tests of Generalized Purchasing-Power Parity: Common Trends and Real Exchange Rates in the Pacific Rim," Review of International Economics, Wiley Blackwell, vol. 2(2), pages 179-90, June.
    35. Enders, Walter & Siklos, Pierre L, 2001. "Cointegration and Threshold Adjustment," Journal of Business & Economic Statistics, American Statistical Association, vol. 19(2), pages 166-76, April.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:eee:japwor:v:21:y:2009:i:3:p:292-300. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.