What drives stock markets over short horizons? Evidence from emerging markets

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The goal of this paper is to examine the importance of permanent and transitory shocks in explaining variations in stock prices for Singapore, Taiwan, and South Korea using a trend-cycle decomposition technique. This study is novel in that in measuring the impact of shocks we not only impose common trend restrictions but also common cycle restrictions. We later undertake a post-sample forecasting exercise to confirm the efficiency gains from imposing common cycle restrictions. We find that over short horizons, transitory shocks are the dominant source of variations in stock prices for South Korea, while permanent shocks explain the bulk of the variations in stock price of Singapore and Taiwan.

Original languageEnglish
Pages (from-to)261-269
Number of pages9
JournalQuantitative Finance
Issue number2
Publication statusPublished - Feb 2011
Externally publishedYes


  • Advanced econometrics
  • Applied econometrics
  • Applied finance
  • Arch
  • Asymmetry

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