PRICE INTERDEPENDENCE AMONG EQUITY MARKETS IN THE ASIA-PACIFIC REGION
Price Interdependence Among Equity Markets in the Asia-Pacific Region
Focus on Australia and ASEAN
EDUARDO D. ROCA
School of Accounting, Banking and Finance
Faculty of Commerce and Management
Griffith University
First published 2000 by Ashgate Publishing
Reissued 2018 by Routledge
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Copyright Eduardo D. Roca 2000
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A Library of Congress record exists under LC control number: 99085932
ISBN 13: 978-1-138-70411-4 (hbk)
ISBN 13: 978-1-138-70410-7 (pbk)
ISBN 13: 978-1-315-20283-9 (ebk)
Contents
This book undertakes a scholarly investigation of the issue of financial markets interdependence or integraton through the application of recently developed and powerful techniques in time series econometrics and through the use of a highly regarded database. The issue of financial interdependence is one that has theoretical, practical and policy significance, and yet it is far from being fully understood. This book investigates equity markets interdependence between Australia and its major trading partners, Australia and the Association of Southeast Asian Nations (ASEAN), and among the ASEAN markets. It analyses the extent and structure of equity market interdependence, both in the short-run and in the long-run within each group of markets taking into account important institutional developments in each country.
There are a large number of studies on equity market interdependence but most of these studies focus on the developed markets to the neglect of the markets that are the subject of the present study. Furthermore, most of these studies deal with either the short-term or long-term linkages between countries but rarely both. These studies are also beset with methodological, conceptual as well as interpretation problems. Hence, the existing evidence on equity market interdependence is generally mixed depending on the data, time period and methodology used. This book addresses this knowledge gap. Utilising weekly data over a 20-year period from Morgan Stanley Capital International, it applies the econometric techniques of cointegration, error-correction model, Granger-causality, forecast variance and impulse response and autoregressive conditional heteroskedasticity model analyses within a vector autoregression framework to investigate the structure of interaction between markets in the short-term and long-term.
The book is organised into eight chapters. The first chapter discusses the objectives and provides an overview of the methodology and overall results. The second chapter expounds on the concept of equity market integration and reviews the existing literature on this topic. The third chapter explains the different econometric techniques used in the book. Chapters four, five, six and seven present the empirical results for the three groups of markets which are analysed against the backdrop of the institutional features of each market that are relevant to equity market interaction. Chapter eight provides a summary of the overall results and the conclusion of the study.
The book will be useful to students of finance, particularly international finance, and investments at the third year undergraduate and postgraduate levels.
I am thankful to Professor W.F. Shepherd for encouraging me to write this book. He and Professor E.A. Selvanathan have provided me with guidance throughout the different stages of writing this book. I also thank Professor Dave Allen for his valuable comments and suggestions in relation to the whole book. I am also grateful to the School of Accounting, Banking and Finance of Griffith University for providing me with the much needed financial support to bring this book into completion. I also wish to thank Dr. Hai Yang Xu for the helpful comments and computer programming assistance that I have received from him. I extend my heartfelt thanks also to Ms Pam Cox for providing the typesetting and proofreading services. Finally, above all, I give praise to the Great Almighty for making this book project possible.
Purpose of the Book
This book examines the issue of equity markets interdependence or integration. The issue of financial market integration is certainly one that is important from a theoretical, practical and policy perspective. Major models in economics, e.g., Mundell-Fleming (see Shepherd, 1994), and finance, e.g., portfolio diversification (see Markowitz, 1959; Lintner, 1965; Sharpe, 1964), depend on this issue. Based on portfolio diversification theory, it is important that investors are aware of the extent of financial integration between markets. If equity markets are less than fully integrated, the benefits of portfolio diversification exist. From a policy perspective, if equity market prices are found to be closely-linked, there is a danger that shocks in one market may spill over to other markets (the so-called contagion effect see King and Wadhwani, 1990). Hence, this may require closer cooperation between the prudential and monetary regulators in the different markets if these effects are to be avoided or minimised.
Massive progress in information and communication processing technology and very substantial financial deregulation have occurred in financial markets over the last 20 years (Honeygold, 1989). Hence, it is claimed that financial markets have become integrated. The stock market crash of 1987 which was felt in markets worldwide is being cited as clear evidence of this interdependence between national financial markets (see, for instance, Hamao, et al., 1991, and King and Wadwhani, 1990). This claim is captured well by the Wall Street Journal of 9 November 1987 (as cited in Jeon and Von Furstenberg, 1990, p. ):
They (investors) were saying for a long time that the stock market was global. But no one really believed them until that day (October 19,1987). Moreover, the crash may have laid to rest Americans long-held notion that New York always led the pack among world stock markets. The old axiom When New York sneezes, Tokyo and London catch a cold, has become outdated. Now it changes to anyone can catch a cold from anyone.
The issue of financial market integration in general, and equity market integration in particular, is, however, far from being settled in the literature. Investigations done on the issue have failed to reach a common conclusion. The results of previous studies vary according to the data, methodology and theoretical models used. Furthermore, most of these studies have focused on the developed markets and very few have been undertaken for the emerging or developing markets such as those in the Asia-Pacific. This book therefore seeks to fill this knowledge gap. It investigates the extent and manner of equity market price interactions among the following groups of countries:
