Modelling the Relationships between US and Selected Asian Stock Markets

It is well known that many countries around the world depend on the US as their major trade partner. As a result, if something does happen to US economy it surely will affect the economy of all these countries. In this study, we investigate the relationship between the US and four Asian emerging stock markets namely Hong Kong, India, South Korea and Malaysia using monthly data between 1996 and 2008. In order to model the relationships, two approaches are used. They are linear Vector Autoregressive (VAR) model and nonlinear Markov Switching Vector Autoregressive (MS-VAR) model. In general we found that the two models manage to explore the possibility of relationship between all the stock markets. Nevertheless, MS-VAR model provide more insight on when all this relationship occurred. In addition, the result also indicates that the MS-VAR model fitted the data well than the linear VAR model.