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Predictability and Regional Integration of Pacific Basin Equity Markets
Author(s) -
Chang Eric C.,
Pinegar J. Michael,
Ravichandran R.
Publication year - 1994
Publication title -
journal of international financial management and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.818
H-Index - 37
eISSN - 1467-646X
pISSN - 0954-1314
DOI - 10.1111/j.1467-646x.1994.tb00033.x
Subject(s) - predictability , equity (law) , diversification (marketing strategy) , economics , shareholder , imperfect , financial economics , econometrics , home market , pacific basin , business , finance , corporate governance , statistics , mathematics , oceanography , market economy , linguistics , philosophy , marketing , political science , law , geology
Between 1986 and 1990, returns on equity indices in Pacific Basin markets can be partially predicted by a set of information variables whose time series coefficients reveal at most one latent variable in the four‐market system. A single‐factor model implies that the reward for bearing a unit of common covariance risk is the same across markets which, in turn, implies that the markets are integrated. Total sample evidence, however, is driven by price movements in the first two subperiods and is also sensitive to other seemingly trivial adjustments to forecasting specifications. Thus, the predictability of Pacific Basin equity returns is inconsistent. To the extent such inconsistencies suggest imperfect regional integration, the costs to non‐Asian firms of providing indirect diversification for their shareholders by investing in real assets in Pacific Rim countries will be high.