The Factors Affecting Stock Market Volatility and ...

1 The Factors Affecting Stock Market Volatility and Contagion: Thailand and South-East Asia Evidence Thesis submitted in partial fulfilment of the requirements for the degree of Doctorate of Business Administration by Paramin Khositkulporn School of Business Victoria University Melbourne February 2013. Declaration I, Paramin Khositkulporn, declare that the DBA thesis entitled The Factors Affecting Stock Market Volatility and Contagion: Thailand and South-East Asia Evidence is no more than 65,000 words in length including quotes and exclusive of tables, figures, appendices, bibliography, references and footnotes.

2 This thesis contains no material that has been submitted previously, in whole or in part, for the award of any other academic degree or diploma. Except where otherwise indicated, this thesis is my own work. Paramin Khositkulporn Date ii Contents Declaration .. ii Contents .. iii List of Tables .. v List of Figures .. vii List of Abbreviations .. viii Acknowledgements .. xi Abstract .. xiii Chapter 1: 1. Research Background .. 1. Definition of Volatility and Contagion .. 3. 3. Contagion .. 5. Research Questions and Research Objectives of the Study.

3 6. Hypothesis .. 6. Statement of Significance .. 8. Contribution of the Research to 8. Research Methodology .. 9. Thesis Structure .. 11. Chapter 2: Literature Review .. 12. Introduction .. 12. Stock Markets and Economic Performance in South-East Asia .. 12. Factors Affecting Stock Market Volatility .. 18. Oil Prices .. 20. Effect of Oil Price on the Economy .. 22. Effect of Oil Price on Financial Market Volatility .. 24. Uncertain Political Conditions .. 28. How Do Political Events Relate to the Stock Market ?

4 29. Thailand's Political Events .. 34. US Subprime Mortgage Loans .. 38. Effect of Subprime Mortgages - Global Economy and Financial Market .. 39. Effect of Subprime Mortgages on the Thailand Economy and Financial Market .. 43. Volatility Definition and Models .. 46. Contagion Definition, Contagion in Financial Markets and 51. Problems and Limitations of Previous Research and Gaps in the Studies .. 61. 61. iii Contagion .. 62. Summary .. 63. Chapter 3: Conceptual Framework and Methodology .. 64. Introduction.

5 64. Theoretical Framework .. 64. Development of the Theoretical Framework for Stock Market Volatility .. 65. Development of the Theoretical Framework on the Contagion Effect .. 66. Conceptual Framework .. 67. Research Questions and Tested Hypotheses .. 68. Contribution of the Theoretical Framework .. 69. Research Methodology .. 70. Research 71. Methods .. 72. Sample Identification .. 72. Data Sources and Data Collection .. 74. Hypothesis Testing for Factors Affecting Thailand's Stock Market 76. Multiple Regression Model.

6 76. GARCH 77. Breusch-Pagan LM Test .. 79. Hypothesis Testing for Contagion in South-East Asia .. 80. Stationary and Non-Stationary Time Series .. 80. Correlation Coefficient Test .. 82. Granger Causality Test .. 84. Summary .. 85. Chapter 4: Research Results and Discussion .. 87. Introduction .. 87. Summary Statistics of Variables .. 87. Multiple Regression Model .. 93. GARCH Model .. 98. Hypothesis Testing and Discussion of Research Question 1 .. 112. Summary Statistics of Monthly Stock Market Returns from South-East 118.

7 Correlation Coefficient Test .. 121. Granger Causality Test .. 125. Hypothesis Testing and Discussion on Research Question 2 .. 129. Summary .. 140. iv Chapter 5: Conclusion and Limitations .. 141. Introduction .. 141. Conclusion on the Factors Affecting Stock Market Volatility .. 141. Conclusion on the Contagion Effect .. 144. Limitations .. 146. Recommendations for Future Research .. 147. References .. 148. Appendices .. 165. Appendix A: The Sample Variables Returns .. 165. Appendix B: Thailand and South-East Asia Stock Market Returns.

8 169. Appendix C: GARCH Family of RSET for Low- Volatility Period .. 173. Appendix D: GARCH Family of RSET for High Volatility Period .. 178. Appendix E: ADF Unit Roots Tests .. 184. Appendix F: Philips Perron Unit Roots Tests .. 192. v List of Tables Table : Index Performance of Major and South-East Asia Stock Markets 2008 .. 13. Table : Growth Rate of Asia's GDP Percentages Change .. 14. Table : Overview of the World Economic Outlook Projections (Percentage Change) .. 15. Table : South-East Asia Market Capitalisation, Share Turnover Velocity, P/E Ratio and Market Yield.

9 15. Table : Index Performance of Major and South-East Asia Stock Markets 2008 .. 15. Table : Thailand's Recent Political Events .. 39. Table : Descriptive Statistics Monthly Returns of Variables on Stock Index of Thailand, February 1999 to October 2010 .. 84. Table : Regression Results on Monthly Return, 1999:02 to 2010:10 (n=140) .. 90. Table : Regression Results of the Low- Volatility Period, 1999:02 to 2006:10 (n=92) .. 90. Table : Regression Results of the High- Volatility Period, 2006:11 to 2010:10 (n=47).

10 91. Table : Summary of Regression Results of the Full Data Set and Two Sub-samples .. 92. Table : Breusch-Pagan LM Test Auxiliary Regression .. 93. Table : GARCH (1, 1) of SET, Period 1999M02 2010M10 (n=140) .. 94. Table : GARCH (2, 1) of RSET, Period 1999:03 to 2010:10 (n=140) .. 95. Table : GARCH (2, 2) of RSET, Period 1999:03 to 2010:10 (n=140) .. 96. Table : GARCH (3, 1) of RSET, Period 1999:03 to 2010:10 (n=140) .. 97. Table : GARCH (2, 3) of RSET, Period 1999:03 to 2010:10 (n=140) .. 97. Table : Schwarz Criterion of GARCH, Period 1999:03 to 2010:10 (n=140).