Does the East and Southeast Asian Equity Market have Integration? A Study of Cointegration Analysis

Abstract

Financial integration can improve the efficiency of capital allocation as well as help diversify risks. This study aims to find and analyze four cases. First, to find and analyze the long-term cointegration between East and Southeast Asian. Second, to find and analyze the short-term causal relationship between East and Southeast Asian equity market. Third, to find the most influential equity market from East Asian toward their Southeast Asian and the most influential equity market from Southeast Asian toward their East Asian. Last, to find the forecast structural analysis for five days horizon period of each country’s price, both East and Southeast Asia. This study uses Johansen’s cointegration method to test long-run relationships between East and Southeast Asian equity markets, Granger-causality, forecast variance decomposition method and forecast with VECM. This study uses daily indices prices collected from Refinitive covered from January 2002 to December 2019. Johansen’s test emphasize that there is a cointegration relationship between East Asian and Southeast Asian stock markets, but the integration process is incomplete. The cointegration vector also emphasize that ASEAN+3 members react differently to external shocks. This study found that the Japan Granger-cause will lead to all stock markets in Southeast Asia, while Singapore and Philippine Granger-cause will lead to all stock markets in East Asia. These results show that Japan is the market with the most connections in Southeast Asia, while Singapore and Philippine are the markets with the most connections in East Asia. Another point of this paper is to emphasize that Japan is the most influential stock market in East Asia, while Singapore is the most influential stock market in Southeast Asia. This study shows that policymakers in East and Southeast Asian countries should synchronize capital market standards, regulations and reduce barriers to capital flow to stimulate the integration of regional stock markets.

Cross-Market Herding: Do ‘Herds’ Herd with Each Other?

“…Four of them (Hong Kong; Japan; Singapore; South Korea) are formally classified as developed and the rest as emerging and this further allows us to gauge whether cross-market herding exhibits any variations in its manifestation contingent on the level of markets' development (more so considering that developed markets tend to maintain fewer/no restrictions vis-à-vis foreign investors compared to their emerging counterparts). 9 East/South East Asian markets tend to exhibit enhanced levels of integration (Yang, et al 2003;Prasetya and Sudrajad, 2022), reflected through their highly correlated market returns and volatility, particularly in the aftermath of financial crises (Tiwari et al, 2013;Guimarães-Filho and Hong, 2016;Wu, 2020) and it would be interesting to explore whether these correlations can be witnessed in their investors' herding as well. Table 1 shows some of the characteristics of the markets under study.…”