Asia-Pacific Stock Market Integration: New Evidence by Incorporating Regime Changes

Abstract

This work provides new evidence of Asia-Pacific stock market integration by incorporating the regime changes of each stock market through the smooth transition autoregressive (STAR) model. According to empirical results, most Asia-Pacific stock market returns follow STAR dynamics to a significant degree with more rapid and frequent regime changes of a shorter nature compared with G7 markets. A series of STAR-based Granger causality tests reveal evidence of stronger equity market integration compared with linear Granger causality tests. We also find that Asia-Pacific stock markets are integrated in different levels. Finally, we provide evidence that in the early twenty-first century the influence of China and the United States on Asia-Pacific stock markets has been maintained while that of Japan has been weakened. cointegrated in the long term and bilaterally Granger caused. Further evidence of Asian stock market integration is revealed in a study by Valadkhani and Chancharat (2008). They also find significant cointegration and Granger causation among Asian stock market indexes over the period from 1987 to 2005 and argue that this empirical evidence supports the leading role of some stock markets in Asia. Burdekin and Siklos (2012) show that the enormous growth of the Shanghai market in the new millennium has been accompanied by a meaningful level of integration with other regional and world markets despite ongoing capital controls.Along with simple linear estimation and its Granger causality test, another empirical framework employed in a price-(or return-) based approach is the synchronization of financial market cycle, which assesses the integration of markets by measuring whether different markets are in the same phase of a cycle (see Candelon et al. 2008;Edwards et al. 2003;Pagan and Sossounov 2003;Yu et al. 2010). Edwards et al. (2003) construct a stock market cycle formula using five characteristics of its phases, such as duration, amplitude, and volatility. They find that Asian stock market cycles have become more dissimilar to those of stock markets in developed countries and tend to have shorter regime duration and larger amplitude and volatility than do the markets of developed countries. Candelon et al. (2008) implement Bry and Boschan's (1971) dating algorithm over a six-month time interval by employing the generalized method of moments (GMM) approach to measure Asian markets' synchronization, and hypothesize a rise in Asian stock market synchronization after the Asian crisis of 1997. Yu et al. (2010) also identify the peaks and troughs of stock markets by comparing the stock returns between the same eight-month time windows and find that the integration process in Asian equity markets has picked up again since late 2007 although this process is not complete. However, these empirical frameworks include boom and bust periods of stock markets determined by uniformly defined characteristics between stock markets rather than being determined by the distinct characteristics of individual markets.In the lit...

Does Intra-Regional Trade Matter in Regional Stock Markets?: New Evidence from Asia-Pacific Region

“…6) Kim et al (2015) find that Asia-Pacific equity markets' regimes changes are, on average, more frequent than that of G7 equity markets.…”

“…However, these empirical frameworks include boom and bust periods of stock markets determined by ad hoc defined characteristics between stock markets not determined by individual markets' endogenous characteristics. For employing a more appropriate empirical framework against weak points in previous studies, Kim et al (2015) uses the smooth transition autoregressive (STAR) model because this model incorporates endogenous changes of stock market states in the traditional Granger causality test in a single empirical model. They find a significantly different degree of financial market integration in expansionary and contractionary regimes over Asia-Pacific regions.…”

Does Intra‐regional Trade Matter in Regional Stock Markets? New Evidence from the Asia‐Pacific Region

“…In order to employ more appropriate regime changing characteristics, Kim et al . () use a smooth transition autoregressive (STAR) model that incorporates endogenous changes of stock market regimes in the traditional Granger‐causality test in a single empirical model. They find significant differences in the degrees of financial market integration between the expansionary and the contractionary regimes across the Asia‐Pacific region.…”

“…However, these empirical frameworks incorporate the boom-and-bust periods of stock markets as determined by ad hoc defined characteristics of stock markets, and not by the endogenous characteristics of individual markets. In order to employ more appropriate regime changing characteristics, Kim et al (2015) use a smooth transition autoregressive (STAR) model that incorporates endogenous changes of stock market regimes in the traditional Granger-causality test in a single empirical model. They find significant differences in the degrees of financial market integration between the expansionary and the contractionary regimes across the Asia-Pacific region.…”

“…One of the challenges in investigating the relationship is that regime changes in the stock markets (i.e. between booms and recessions) have to be taken into account because the boom‐and‐bust stock market cycle of the Asia‐Pacific region is known to change more frequently, with the individual regimes persisting for much shorter times, compared to the cases of mature stock markets such as those in the G7 economies (Edwards et al, ; Kim et al, ). Another challenge is the long‐run comovements of stock indices between countries, which need to be considered in the model specification (Azman‐Saini et al, ; Wongbangpo and Sharma, ; Valadkhani and Chancharat, ).…”