Does Intra-regional Trade Matter in Regional Stock Markets? New Evidence from the Asia-Pacific Region

Abstract

We provide new evidence on the relationship between bilateral trade and stock market returns across the Asia-Pacific region. Using three country blocs in this region, including the Far Eastern bloc, the Chinese bloc and the Australian bloc, we examine whether trade linkages between countries affect their stock returns. Incorporating two distinct dynamic properties of regime shifting and cointegration in intra-regional trade and stock market returns, we employ the newly suggested multivariable smooth transition autoregressive vector error correction model (STAR-VECM). A series of estimations reveals evidence that bilateral trade significantly Granger-causes stock returns in the Asia-Pacific region, with effects that are asymmetric depending upon the stock market regime and the country pair. Among the three blocs, the Far Eastern bloc displays a more pronounced positive effect of bilateral trade growth on stock returns than do the other blocs.