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Jurnal Ekonomi Malaysia

46 (2) 2012 101 – 114

Momentum and Nonlinear Price Discovery in Sovereign Credit Risk and Equity Markets of the Organization of Islamic Cooperation (OIC) Countries
Momentum dan Penemuan Harga Tidak Liner pada Risiko Kredit Tertinggi dan Pasaran Ekuiti Negara-negara Pertubuhan Kerjasama Islam (OIC)

Stetson School of Business and Economics
Mercer University
1400 Coleman Avenue
Macon, GA 31207

ngene_gm@mercer.edu

Department of Economics and Finance
University of New Orleans
New Orleans, LA 70148, USA
mhassan@uno.edu

KabirHassan63@gmail.com

Abstract

This paper hypothesized that there is a differential response by agents to changes in sovereign credit risk in both calm (low default risk) and turbulent (high default risk) markets. These market conditions create two different states of the world or regimes. The two model regimes have been made using threshold cointegration and vector error correction model in three possible pairs of sovereign CDS, bond and equity markets for four emerging markets. Moreover, evidence of momentum in cointegration relationships in 75% of the time. Positive and negative divergences adjust to equilibrium relationship and value (threshold) at different speeds and magnitudes depending on the regime. Moreover, short-term nonlinear adjustment process is found in 50% of possible asymmetries. The informativeness of each asset in a pair is nonlinear and regime dependent in 14/24 possible price discovery processes. Therefore, dynamic interaction among assets held in a portfolio shift with regime change. Investors, in making decisions regarding portfolio rebalancing and hedging against downside risk need to identify when regimes change to make informed decisions while policy makers need to identify the threshold below or above which policy intervention in the market becomes necessary. Linear modeling may provide mis-specified and biased results as indicated by comparative results of linear and nonlinear modeling.

Keywords

CDS; credit risk JEL; equity index; financial integration; Price discovery; sovereign bonds
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ngene, , & Hassan, (2012). Momentum and Nonlinear Price Discovery in Sovereign Credit Risk and Equity Markets of the Organization of Islamic Cooperation (OIC) Countries. Jurnal Ekonomi Malaysia, 46(2), 101–114.

@article{ngene2012momentum,
  title={Momentum and Nonlinear Price Discovery in Sovereign Credit Risk and Equity Markets of the Organization of Islamic Cooperation (OIC) Countries},
  author={ngene, Geoffrey and Hassan, Mohammad Kabir},
  journal={Jurnal Ekonomi Malaysia},
  volume={46},
  number={2},
  pages={101—114},
 

year={2012},
}

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