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RESEARCH CONFERENCE ON SAFETY AND EFFICIENCY OF THE FINANCIAL SYSTEM 27th AUGUST 2007

ASIA-LINK PROGRAMME Euro-Philippines Network in Banking & Finance Enhancing Teaching and Research Asialink/ASIE/B7-3010/2005/105-139. RESEARCH CONFERENCE ON SAFETY AND EFFICIENCY OF THE FINANCIAL SYSTEM 27th AUGUST 2007. WORLD BUSINESS CYCLE, LOCAL SPECIALIZATION AND ASSET PRICES.

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RESEARCH CONFERENCE ON SAFETY AND EFFICIENCY OF THE FINANCIAL SYSTEM 27th AUGUST 2007

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  1. ASIA-LINK PROGRAMMEEuro-Philippines Network in Banking & FinanceEnhancing Teaching and ResearchAsialink/ASIE/B7-3010/2005/105-139 RESEARCH CONFERENCEONSAFETY AND EFFICIENCY OF THE FINANCIAL SYSTEM 27th AUGUST 2007

  2. WORLD BUSINESS CYCLE, LOCAL SPECIALIZATIONAND ASSET PRICES Noëlle DUPORT Daniel GOYEAU Genelyn Ma. SARTE

  3. Origins of the benefits from international portfolio diversification: • Two approaches: • The “country approach”: hypothesis of non perfect integration of the national economies • The “sectoral approach”: hypothesis of non perfect synchronization of the different industries during the worldwide activity cycle. The common hypothesis of these two approaches: the financial cycle depends on the business cycle Aim of this paper: to study what can be the contribution of several south-east and central Asian countries in a logic of international portfolio diversification?

  4. Methodology Used to Address the Objective of the Study • 3 steps: - fit a univariate Markov-switching autoregressive (MSAR) model with two regimes to each series MSM(H) MSI(H)

  5. Methodology Used to Address the Objective of the Study - compute the degree of concordance (Harding and Pagan, 2002)between cycles of two series modified degree of concordance

  6. Methodology Used in to Address the Objective of the Study - perform the robust test for strong non- synchronization (Harding and Pagan, 2006) tests for the hypothesis between two regime variables with correction for serial correlation and heteroscedasticity analysis includes cases where h=0, h<0, and h>0

  7. The concordance between business and financial cycles of each country

  8. The concordance between business and financial cycles of each country US Emerging countries Financial cycle Financial cycle Leading by 3 months No link (except for Singapore) Business cycle Business cycle The financial markets of the emerging countries are not driven by their own real conditions. Are they driven by the worldwide cycle (financial and/or business)?

  9. Are they driven by the worldwide financial cycle? The concordance between financial cycles of the US and emerging countries

  10. Are they driven by the worldwide financialcycle? The concordance between financial cycles of the US and emerging countries 3 cases: Indonesia, Philippines and Singapore: These financial markets are leading the worldwide financial cycle Korea and Malaysia: These financial markets have no significant concordance with the worldwide financial cycle Thailand: This financial market is lagging the worldwide financial cycle, and is counter-cyclical YES NO YES

  11. Are they driven by the worldwide business cycle? The concordance between financial cycle of emerging countries and the business cycle of the US

  12. Are they driven by the worldwide business cycle? The concordance between financial cycle of emerging countries and the business cycle of the US 3 cases: Indonesia, Philippines: These financial markets are leading the worldwide business cycle Korea, Malaysia and Singapore: These financial markets have no significant concordance with the worldwide business cycle Thailand: This financial market is lagging the worldwide business cycle, and is counter-cyclical YES NO YES

  13. Conclusion in terms of international portfolio diversification: Indonesia Philippines Singapore • The financial markets do not depend on the local real conditions (or very slightly for Singapore) • but on the other hand depend on the worldwide financial market. • However this dependence does not remove all their interest in diversification term insofar as they present a significant lead compared to the US financial market. In this case, the investor can apply a geographical strategy of rotation

  14. Conclusion in terms of international portfolio diversification: Korea Malaysia • The financial markets do not depend on the local real conditions • and they do not depend on the worldwide financial market. • the investor can use these financial markets to apply a strategy of diversification in purely speculative matter

  15. Conclusion in terms of international portfolio diversification: Thailand • The financial market does not depend on the local real conditions • but on the other hand depends on the worldwide financial market, in a counter-cyclical way. • In this case, the investor can use this market in a simple logic of diversification.

  16. Maraming Salamat!

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