Problems and Limitations of Previous Research and Gaps in the Studies

2.6.1 Volatility

This study introduces the determinative factors of the volatile stock market in the short and long term. According to previous research, for example in Caner and Onder (2005), Abugri (2002), Wang and Lin (2009) and Cipriani and Kaminsky (2007), exchange rate, inflation, interest rate, dividend yield, industrial production and money supply affect stock market volatility. However, the effect of oil price fluctuations, the subprime crisis and political uncertainty should be acknowledged as factors in stock market volatility for the following reasons.

First, previous research factors, such as exchange rate, inflation, interest rate, dividend yield, industrial production and money supply, varied by fiscal and monetary policies that were influenced by government. If the political situation is uncertain, it will affect financial policies and then turn volatile in the stock market. Bautista (2003) indicates that the major change in the Philippine stock market was a result of a series of military coups, the Asian financial crisis and capital account restrictions. Nimkhunthod (2007) evaluated 30 political events in Thailand and their effect on the SET. He concluded that the negative shock in the stock market was given by a coup d'état, house dissolution and a state of emergency. The statistics compiled by the SET 2010 are highly volatile and underperforming. After the government announced the state of emergency and the crackdown on demonstrators, the stock market slumped from 812.63 in April 2010 to 721.29 in May 2010 and continues to decline.

Second, the studies of Miller and Ratti (2009), Chen (2009), Aloui and Jammazi (2008) and Park and Ratti (2008) show that rising oil prices have a significant role in determining both the probability of transmission across regimes and the volatility in stock market, while some studies argue that oil prices can affect the stock market on both sides. For instance, the work of Nandha and Faff (2008) concluded that only equity in the oil and mining industrial sectors experience a positive effect when oil prices increase, while 33 other industrial sectors experience a negative effect. Papapetron (2001) states that the movement of oil prices play a significant role in explaining economic activity, rather than the movement of stock market returns. Similarly, a study of Al-Fayoumi (2009) indicates that the local macroeconomic

59

activity was more significant than the movement of oil prices in explaining the volatility in the stock market.

Third, the global financial crisis caused by the US subprime meltdown brought about investor sentiment. As a result of the crisis, by the end of 2008, the SET index decreased 48 per cent from 858.10 at the end of 2007 to 449.96 at the end of 2008 due to the global financial crisis, the oil price crisis and internal political instability (SET 2009). Burdekin and Siklos (2012) report that the S&P 500 index is a major factor affecting stock market in the Asian-Pacific.

Therefore, there have not been other studies of the factors affecting stock market volatility relative to oil prices, the US subprime crisis and the BSI index in the context of Thailand’s stock market. Also, the volatility of Thailand’s stock market has not been examined so far. As a result, this study will fill this gap by exploring the factors that bring about the volatility of Thailand’s stock market and by examining the volatility.

2.6.2 Contagion

Since 1997, the issue of the contagion effect in Thailand has been known as the currency contagion, which began with the Thai currency system changing and affected other internal sectors, such as banking the equity market, and reduced the national economy. The changing of the currency system from fixed to floating caused financial problems and this became a crisis that was transmitted to other financial markets in the region and globally.

Previous literature has attempted to test whether there was a contagion across countries related to the currency crisis, from developing markets to other markets (Eun & Resnick 2004; Hughes & MacDonald 2002; Arestis, Caporale & Spagnolo 2005). The contagion between market sectors across countries via currency crises has been tested (Wilson & Zurbruegg 2004). Testing has also been undertaken for contagion across countries, which related to credit crisis and developed market to other markets (Longstaff 2010; Yilmaz 2009a). Consequently, contagion from one market to another market has been investigated in a similar theoretical framework. However, the contagion of the proposed factors affecting stock market volatility in Thailand has not been examined so far, and there has been little research on Thailand’s stock market relative to other stock markets in the region. As a result, this paper will fill a gap by observing the transmission from the new release of the factors affecting stock market volatility in Thailand to other equity markets in the same region. This

60

has not been carried out in other studies that tested for a possible contagion in the Thai context. This paper will examine if oil price fluctuation presented a contagion effect from the energy market to the financial market, if the subprime crisis presented a contagion effect from the credit market to the developed and developing financial market and if political instability presented a contagion effect from the unstable domestic condition to the financial market within the same region.