Relationship Between Stock Markets
JOURNAL OF APPLIED MATHEMATICS AND DECISION SCIENCES, 8(4), 201–218 Copyright c 2004, Lawrence Erlbaum Associates, Inc.
The Relationship Between Stock Markets Of Major Developed Countries And Asian Emerging Markets
WING-KEUNG WONG† Department of Economics, National University of Singapore JACK PENM Faculty of Economics and Commerce, Australian National University RICHARD DEANE TERRELL National Graduate School of Management, Australian National University KAREN YANN CHING LIM Department of Economics, National University of Singapore
Abstract. With the emergence of new capital markets and liberalization of stock markets in recent years, there has been an increase in investors’ interest in international diversification. This is so because international diversification allows investors to have a larger basket of foreign securities to choose from as part of their portfolio assets, so as to enhance the reward-to-volatility ratio. This benefit would be limited if national equity markets tend to move together in the long run. This paper thus studies the issue of co-movement between stock markets in major developed countries and those in Asian emerging markets using the concept of cointegration. We find that there is co-movement between some of the developed and emerging markets, but some emerging markets do differ from the developed markets with which they share a long-run equilibrium relationship. Furthermore, it has been observed that there has been increasing interdependence between most of the developed and emerging markets since the 1987 Stock Market Crash. This interdependence intensified after the 1997 Asian Financial Crisis. With this phenomenon of increasing co-movement between developed and emerging stock markets, the benefits of international diversification become limited. Keywords: Developed market, emerging market, stock index, unit root test, cointegration.
1.
Introduction
In recent years, new capital markets have emerged in many parts of the world,
The Relationship Between Stock Markets Of Major Developed Countries And Asian Emerging Markets
WING-KEUNG WONG† Department of Economics, National University of Singapore JACK PENM Faculty of Economics and Commerce, Australian National University RICHARD DEANE TERRELL National Graduate School of Management, Australian National University KAREN YANN CHING LIM Department of Economics, National University of Singapore
Abstract. With the emergence of new capital markets and liberalization of stock markets in recent years, there has been an increase in investors’ interest in international diversification. This is so because international diversification allows investors to have a larger basket of foreign securities to choose from as part of their portfolio assets, so as to enhance the reward-to-volatility ratio. This benefit would be limited if national equity markets tend to move together in the long run. This paper thus studies the issue of co-movement between stock markets in major developed countries and those in Asian emerging markets using the concept of cointegration. We find that there is co-movement between some of the developed and emerging markets, but some emerging markets do differ from the developed markets with which they share a long-run equilibrium relationship. Furthermore, it has been observed that there has been increasing interdependence between most of the developed and emerging markets since the 1987 Stock Market Crash. This interdependence intensified after the 1997 Asian Financial Crisis. With this phenomenon of increasing co-movement between developed and emerging stock markets, the benefits of international diversification become limited. Keywords: Developed market, emerging market, stock index, unit root test, cointegration.
1.
Introduction
In recent years, new capital markets have emerged in many parts of the world,
References: 39. Watson. J. The Stationary of Inter-Country Correlation Coefficients: A Note, Journal of Business Finance and Accounting, 7, 297-303, 1980.