Stock market integration of emerging Asian economies: Patterns and causes

a r t i c l e i n f o JEL classification: G01 G11 G15 Keywords: Stock market integration DCC-GARCH model Price differentials Exchange rate risk Trade linkages GFC EGARCH In this study, we examine the patterns and causes of stock market integration of selected emerging Asian nations against the US, Australia, China, and India for the period 1 January 2001 to 31 March 2012. We compare patterns of market integration for countries on a daily, weekly, or monthly basis using the time-varying correlation technique , namely, GARCH-dynamic conditional correlations (DCCs). In doing so, we suggest that opportunities in cross border investment vary by frequencies. We also divide daily data into subsamples and find that correlations were strongest during the global financial crisis (GFC) of 2007–09. The time varying bilateral correlations are found to be highly volatile. We also investigate the causes of identified correlations and find that apart from the GFC, the underlying economic and financial conditions have also been responsible for the higher correlations between these stock markets. Asian markets have been generally perceived as having low exposure to global factors and therefore little integration with western economies (see Aityan et al. Hence, incorporating emerging Asian market stocks in an investment portfolio was seen as part of attempting to increase returns and reduce risks (Johnson and Soenen, 2002). However, recent studies on market integration suggest that national stock markets have become much more correlated than in recent decades (see Arouri et al. Some studies suggest that the global financial crisis (GFC) has been responsible for this high correlation in more recent times. For instance, Assidenou (2011) shows eight developed and two emerging stock markets that were co-financial markets, volatility more than news played a key role in explaining the higher correlations amongst developed and emerging stock markets, although news became relatively more important in the GFC period. Chakrabarti (2011) showed that the volatility spillover effects intensified in the financial crisis for the eight Asia-Pacific stock markets, In this paper, we investigate two things. First, we examine the degree to which the selected emerging Asian markets are integrated with those of Australia, the US, China, and India. Second, we explain the causes of this correlation within the EGARCH framework. The relationship between these four groups (Asia–Australia; Asia–US; Asia– China; and Asia–India) is particularly interesting. From the perspective of trade and finance, Asia–US relations have been the closest. We …