Testing for linear and nonlinear relationship in the stock-bond relation : Malaysia evidence
Stocks and bonds have been historically chosen as the main asset for investment. Most of the investors believe that bonds are a direct substitution for stocks, especially government bonds. Early studies extensively studied the correlation between stocks and bonds, in order to make a prediction about...
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| Format: | Thesis |
| Language: | English English |
| Published: |
2012
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| Subjects: | |
| Online Access: | https://eprints.ums.edu.my/id/eprint/41624/1/ABSTRACT.pdf https://eprints.ums.edu.my/id/eprint/41624/2/FULLTEXT.pdf |
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| Summary: | Stocks and bonds have been historically chosen as the main asset for investment. Most of the investors believe that bonds are a direct substitution for stocks, especially government bonds. Early studies extensively studied the correlation between stocks and bonds, in order to make a prediction about stocks based on bonds. However, the directions of correlation between these two markets are not always entire clear. In recent studies, linear cointegration and Granger causality test have been applied to investigate the long run and short run relationship between stocks and bonds. However, if the true relationship is nonlinear, the inferences from linear model may be misleading. Moreover, prior empirical studies had found the nonlinearities in stocks prices. Hence, in this study, the standard linear and nonlinear cointegration and causality tests are employed to investigate the linear and nonlinear relationship between stocks and bonds market indices in Malaysia case from January 1994 till December 2010. The cointegration tests show that no cointegration between stocks and bonds indicates that bond market is not a close substitution to stock market in Malaysia. All the three maturity periods of bonds are found to linear and nonlinear Granger cause stocks. These results may due to the policies of Malaysian government in enhancing the strong development of the bond markets. From the results, it is suggested that researchers should consider nonlinear mechanisms when evaluating the relation of stocks and bonds. |
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