Regional Inter-dependence among National Stock Markets: Evidence from Asia and Europe

In this paper we study the nature of regional inter-dependence among selected Asian stock markets and contrast it with that among selected European markets before and during the Asian crisis. We ask if the Asian crisis marked any fundamental change in the basic nature of these relationships. Using daily dollar-denominated returns data from eight East Asian and eight European stock markets, we study the "spillover" angle of stock market inter-relationship as well as the evolution of the correlation structure over time. We find that the East Asian countries are less susceptible to volatility contagion compared to Europe though the susceptibility increased during the crisis in both regions, more so in Asia. They also have higher covariance than Europe. The correlation structure is volatile in both regions with Asia being more stable than Europe before the crisis. During the crisis the ordering was reversed though both regions experienced greater instability in the correlation structure. The Asian crisis led to higher covariance in both regions but this was largely because of rise in variance rather than a rise in correlation. * I would like to thank Richard Roll, Sebastian Edwards, Avanidhar Subrahmanyam, Peter Schott, Alejandro Jara, Kyongchul Kim and particularly Andrey Pavlov for illuminating comments and suggestions. The responsibility for the blemishes and shortcomings remains only with me.