Financial Market Theory of Development – Evidence from Palestine and Israeli Stock Exchanges

Abdul Razak Abdul Hadi, Eddy Yap Tat Hiung, Shadi Ali Hamad, Tahir Iqbal

Abstract


ABSTRACT

This study is compelled by the motivation to find out potential equilibrium and dynamic relationships involving two neighboring stock exchanges - Palestine Stock Exchange (PEX) and Tel Aviv Stock Exchange (TASE). Based upon Financial Market Theory of Development, we attempt to explore the degree of integration between the two exchanges using Engle-Granger Cointegration procedures (1987). Data were collected on monthly basis over sample period from January 1998 till February 2012. The empirical results from bivariate Error Correction Model (ECM) reveal a statistically significant long-term relation between the two exchanges. However, the results from Granger Causality tests indicate absence of short-term relationships between them. To unveil Granger Causality in a dynamic context, we use out-of-sample testing via Impulse-Response Functions (IRF) and Variance Decompositions (VDC.) Interestingly, both tests show that performance of TASE does affect its archrival.

Keywords: Al-Quds index; Tel Aviv - 100 index; financial market theory of development; bivariate error correction model

ABSTRAK

Kajian ini menjurus kepada keinginan mencari potensi keseimbangan dan hubungan dinamik di antara dua pasaran saham berjiran di rantau bergolak – Palestine Stock Exchange (PEX) dan Tel Aviv Stock Exchange (TASE). Berdasarkan kepada Teori Pembangunan Pasaran Kewangan, analisa kadar integrasi ke atas kedua-dua pasaran saham dibuat menggunakan ujian kointegrasi Engle-Granger (1987). Data bulanan dikumpul dari Januari 1998 sehingga Februari 2012. Keputusan empirikal daripada analisa Bivariate Model Pembetulan Ralat menunjukkan wujud hubungan signifikan jangka panjang di antara kedua-dua pasaran saham. Walau bagaimanapun, ujian kesan-akibat Granger menunjukkan tiada hubungan jangka pendek yang signifikan. Ujian-ujian ex-post seterusnya menunjukkan bahawa prestasi TASE mempengaruhi pasaran saham Palestine.

Kata kunci: Indeks al-Quds, Tel Aviv – 100 indeks; teori pembangunan pasaran kewangan; bivariate model pembetulan ralat


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