Second-tier stock market efficiency and dynamic impacts on macroeconomic development: evidence from tropical economies

Background: The Tropics has recently emerged as an important geopolitical region with an economic growth rate outperforming the rest of the world. Second-tier stock markets are wellacknowledged as a critical alternative source of funding for Small and Medium Enterprises (SMEs) and can be seen as a key catalyst for innovation. These markets, which offer several benefits for both SMEs and investors, have been increasingly established across the world since the 1990s. This thesis, therefore, centres around second-tier stock markets in the Tropics. Objectives and Scope of the Research: This thesis presents findings from the following three research studies: (1) Evolution of second-tier stock market efficiency and dual long memory in the market under the joint impacts of thin trading, structural breaks, and inflation; (2) Dynamic return and asymmetric volatility transmissions between main stock market and second-tier stock market while accounting for the effects of thin trading, volatility breaks and trading volume; and (3) Dynamic impacts of second-tier stock market development and innovation on macroeconomic indicators within a Kaleckian-Post-Keynesian growth model. Regarding the scope of the research, Hong Kong, Singapore, Thailand and Malaysia were selected for empirical analysis since these four economies are not only Asian 'tigers' and 'tiger cubs' but also levers for growth in the tropical region. Methodology: Study One adopted a State-Space Non-linear Generalized Autoregressive Conditional Heteroscedasticity in Mean (GARCH-M) model with Kalman Filter estimation to depict the evolution of weak-form market efficiency. A set of fractionally integrated models such as Autoregressive Fractionally Integrated Moving Average (ARFIMA), Fractionally Integrated GARCH (FIGARCH), Fractionally Integrated Asymmetric Power ARCH (FIAPARCH), and Hyperbolic GARCH (HYGARCH) were used to estimate dual long memory properties in return and volatility. The joint impacts of thin trading, structural breaks and inflation on dual long memory were examined using relevant adjustment techniques that involve an Iterated Cumulative Sum of Squares (ICSS) algorithm and a State-Space Linear AR model with Kalman Filter estimation. In Study Two, a Bivariate Vector Autoregressive (VAR) Asymmetric Baba-Engle-Kraft- Kroner (BEKK) GARCH model was adopted to investigate the dynamic transmissions of return and asymmetric volatility between main stock market and second-tier stock market. The ICSS algorithm was applied to detect multiple volatility breaks in the two stock markets and the State- Space Linear AR model with Kalman Filter estimation was used to adjust for thin trading in second-tier stock market. To control for the joint effects of thin trading, volatility breaks and trading volume, the Bivariate VAR Asymmetric BEKK-GARCH model was extended with a dummy variable indicating volatility breaks, an aggregate trading volume variable, and a dethinned return variable. Study Three was grounded on the Kaleckian-Post-Keynesian theoretical model of growth and distribution to explore the macroeconomic impacts of second-tier stock market development and innovation. This theoretical model is renowned for its effective demonstration of the integrated relationships among behavioural functions of an economy including private investment, domestic savings, income distribution, productivity growth, net exports and employment. In this study, the functions of private investment, domestic savings, productivity growth, and employment were extended with the indicators of second-tier stock market development and innovation. A Structural Vector Error Correction (SVEC) model with short-run restrictions and SVEC Impulse Response Function were adopted to delineate the dynamic impacts of second-tier stock market development and innovation on macroeconomic functions. Results: Study One reports that second-tier stock markets in Hong Kong, Singapore, Thailand and Malaysia are still weak-form inefficient; however, those in Hong Kong and Singapore show tendencies towards efficiency. These tendencies appear to align with the increasing market capitalisation and traded value and several institutional reforms. The inefficiency of the markets is mainly owing to the presence of stationary long memory in return and/or volatility. Thin trading, structural breaks and inflation jointly have diminishing effects on the magnitude and/or statistical significance of dual long memory estimates. In Study Two, Hong Kong shows return transmission from second-tier stock market to the main stock market, while Singapore, Thailand and Malaysia show return transmission in the reverse direction. Only Singapore exhibits volatility transmission from the main stock market to second-tier stock market. Thin trading, volatility breaks and trading volume jointly decrease (increase) the magnitude and significance level of return transmission from second-tier (main) market to the main (second-tier) market. The underlying volatility transmissions dissipate or strengthen in magnitude and significance level. Furthermore, the evidence exposes a causality and a long-run equilibrium relationship from Hong Kong's main market returns to the country's economic development. Given the aforementioned return transmission from second-tier market to the main market in Hong Kong, its second-tier market thus can make an indirect contribution to economic development through the main market channel. Study Three reports that second-tier stock market development and/or innovation in Hong Kong, Singapore, Thailand and Malaysia have small but positive effects on the economic growth process in the short run. Second-tier stock markets in Hong Kong, Singapore and Thailand foster growth through the combination of the following three channels: private investment, domestic savings, and productivity growth. On the other hand, innovation in all four countries promotes growth through the combination of the following four channels: private investment, domestic savings, productivity growth and employment. Conclusions: The results of Study One implies the efficacy of institutional reforms and the importance of market development to the tendency towards efficiency in second-tier stock markets of Hong Kong and Singapore. Ignoring thin trading, structural breaks and inflation while modelling dual long memory in return and volatility may overestimate the corresponding true values. Study Two and Study Three indicate that second-tier stock market in Hong Kong can make contribution to economic development directly and indirectly via return transmission with the main market channel. Meanwhile, second-tier stock markets in Singapore and Thailand can only make direct contributions to the economic growth process. Moreover, failure to account for thin trading, volatility breaks and trading volume may distort the transmissions of return and volatility between main markets and second-tier markets. Study Three also indicates a major role of innovation in Hong Kong, Singapore, Thailand and Malaysia in the process of macroeconomic development. Accordingly, this thesis contains many important implications for academics, policymakers and professional practitioners in developing and investing in second-tier stock markets.