Conditional and Unconditional Causality Relations between Taiwan and International Capital Markets

Abstract

This paper examines the conditional and unconditional causality relations between Taiwan and international capital markets, including the U.S., the U.K., the Japanese, and the Hong Kong markets for the period of 1982-1992. We intent to divide the whole period into two subsamples, 1982:1-1987:10/18(the pre-crash period) and 1987:10/20-1992:12(the post-crash period). A multiple hypotheses testing method is employed to identify pairwise causal relations. The testing method allows us to systematically examine all relevant hypotheses regarding the dynamic relations between Taiwan and international capital markets. We document a feedback relation, under the condition of the U.S. effect, between Taiwan and international capital markets. It implies the integration of Taiwan and international capital markets. In examining the unconditional causality relations between markets, we find an independent relation and a contemporaneous relation between markets in the pre-crash period and in the post-cash period, respectively. It shows the integration of Taiwan and international capital markets after the October Crash in 1987.