Linkages between the US and Australian markets: Time series evidence
Faculty of Business and Public Management
School of Accounting, Finance and Business Economics
Globalisation and reduction of restrictions on interna-tional cross listings have led to significant growth in in-formation linkages and cross-border equity flows among stock markets. In making financial decisions with regard to investment and risk management, it is important for corporate management to understand the behaviour of in-formation linkages and correlations between markets. The aim of this paper is to examine the dynamic of price transmissions between the Australian shares and its American depository receipts (ADRs) for individual firm and the relationship between their share returns for all firms. Johasen maximum likelihood method is used to test for possible long-run cointegrating relationship between five pricing factors, namely, the price of the Australian ADRs and the underlying shares, the Australian and US market indices and the exchange rate, for individual firm. The seemingly unrelated regression is used to estimate the short run dynamics of the five pricing factors for all firms. In addition, the effect and persistence of a shock in one pricing factor to itself as well as to the other factors in the system are also analysed.