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. 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: Introduction........................................................................................................... 1 1.1 Research Background ................................................................................................. 1 1.2 Definition of Volatility and Contagion ....................................................................... 3 1.2.1 Volatility ......................................................................................................... 3 1.2.2 Contagion ....................................................................................................... 5 1.3 Research Questions and Research Objectives of the Study ........................................ 6 1.4 Hypothesis .................................................................................................................. 6 1.5 Statement of Significance ........................................................................................... 8 1.6 Contribution of the Research to Knowledge ............................................................... 8 1.7 Research Methodology ............................................................................................... 9 1.8 Thesis Structure ........................................................................................................ 11 Chapter 2: Literature Review ............................................................................................... 12 2.1 Introduction ............................................................................................................... 12 2.2 Stock Markets and Economic Performance in South-East Asia ............................... 12 2.3 Factors Affecting Stock Market Volatility ............................................................... 18 2.3.1 Oil Prices ...................................................................................................... 20 2.3.2 Effect of Oil Price on the Economy ............................................................. 22 2.3.3 Effect of Oil Price on Financial Market Volatility ....................................... 24 2.3.4 Uncertain Political Conditions ..................................................................... 28 2.3.5 How Do Political Events Relate to the Stock Market? ................................ 29 2.3.6 Thailand’s Political Events ........................................................................... 34 2.3.7 US Subprime Mortgage Loans ..................................................................... 38 2.3.8 Effect of Subprime Mortgages - Global Economy and Financial Market ... 39 2.3.9 Effect of Subprime Mortgages on the Thailand Economy and Financial Market ..................................................................................................... 43 2.4 Volatility Definition and Models .............................................................................. 46 2.5 Contagion Definition, Contagion in Financial Markets and Measuring ................... 51 2.6 Problems and Limitations of Previous Research and Gaps in the Studies ............... 61 2.6.1 Volatility ....................................................................................................... 61 iii 2.6.2 Contagion ..................................................................................................... 62 2.7 Summary ................................................................................................................... 63 Chapter 3: Conceptual Framework and Methodology ....................................................... 64 3.1 Introduction ............................................................................................................... 64 3.2 Theoretical Framework ............................................................................................. 64 3.2.1 Development of the Theoretical Framework for Stock Market Volatility ... 65 3.2.2 Development of the Theoretical Framework on the Contagion Effect ........ 66 3.3 Conceptual Framework ............................................................................................. 67 3.4 Research Questions and Tested Hypotheses ............................................................. 68 3.4.1 Contribution of the Theoretical Framework ................................................. 69 3.5 Research Methodology ............................................................................................. 70 3.5.1 Research Approach ....................................................................................... 71 3.6 Methods .................................................................................................................... 72 3.6.1 Sample Identification ................................................................................... 72 3.6.2 Data Sources and Data Collection ................................................................ 74 3.7 Hypothesis Testing for Factors Affecting Thailand’s Stock Market Volatility ........ 76 3.7.1 Multiple Regression Model .......................................................................... 76 3.7.2 GARCH Model ............................................................................................. 77 3.7.3 Breusch-Pagan LM Test ............................................................................... 79 3.8 Hypothesis Testing for Contagion in South-East Asia ............................................. 80 3.8.1 Stationary and Non-Stationary Time Series ................................................. 80 3.8.2 Correlation Coefficient Test ......................................................................... 82 3.8.3 Granger Causality Test ................................................................................. 84 3.9 Summary ................................................................................................................... 85 Chapter 4: Research Results and Discussion ....................................................................... 87 4.1 Introduction ............................................................................................................... 87 4.2 Summary Statistics of Variables ............................................................................... 87 4.3 Multiple Regression Model ...................................................................................... 93 4.4 GARCH Model ......................................................................................................... 98 4.5 Hypothesis Testing and Discussion of Research Question 1 .................................. 112 4.6 Summary Statistics of Monthly Stock Market Returns from South-East Asia ....... 118 4.7 Correlation Coefficient Test ................................................................................... 121 4.8 Granger Causality Test ........................................................................................... 125 4.9 Hypothesis Testing and Discussion on Research Question 2 ................................. 129 4.10 Summary ............................................................................................................... 140 iv Chapter 5: Conclusion and Limitations ............................................................................. 141 5.1 Introduction ............................................................................................................. 141 5.2 Conclusion on the Factors Affecting Stock Market Volatility ............................... 141 5.3 Conclusion on the Contagion Effect ....................................................................... 144 5.4 Limitations .............................................................................................................