Stock market integration: Malaysia and its major trading partners

Abdul Karim, Zulkefly and Abdul Karim, Bakri (2008): Stock market integration: Malaysia and its major trading partners.

Abstract

This study examines the stock market integration among Malaysia and its major trading partners by employing Johansen (1988) and Johansen and Juselius (1990) cointegration tests and VECM approach in investigating the dynamic linkages between markets. By using a weekly data, the results indicate that Malaysia stock market is significantly influenced by the stock market development from the major trading partners. The empirical findings are consistent with the view that stronger the bilateral trade ties between two countries, the higher the degree of comovements (Masih and Masih, 1999; Bracker et al., 1999). Since the markets move towards a greater integration, there are no opportunities for international portfolio diversification. In addition, any development in the stock market from major trading partners can not be ignored and should be taken into consideration by the Malaysian government in designing an appropriate policy in the domestic stock market.

• Item Type: MPRA Paper
• Language: English
• Keywords: Cointegration; VECM; major trading partners; stock market integration
• Subjects: C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy; C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C22 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes; F - International Economics > F3 - International Finance > F36 - Financial Aspects of Economic Integration

References

Akaike, H. (1977), “On Entropy Maximasation Principle,” in P.R. Krisniah, Application of Statistics. North-Holland Amsterdam.

Arshanapalli, B., and Doukas. J. (1993), “International Stock Market Linkages: Evidence from the Pre- and Post-October 1987 Period", Journal of Banking and Finance, pp. 193-208.

Arshanapalli, B., Doukas, J. and Lang, L. (1995), “Pre and Post-October 1987 Stock Market Linkages between US and Asian Markets,” Pacific-Basin Finance Journal, 3, pp. 57–73.

Azman-Saini, W.N.W., Azali, M., Habibullah, M.S. and Matthews, K.G. (2002), “Financial Integration and the ASEAN-5 Equity Markets,” Applied Economics, 34, pp. 2283-2288.

Bachman, D., Choi, Jongmoo J., Jeon, Bang Nam., and Kopecky, Kenneth J. (1996), “Common Factors in International Stock Prices: Evidence from a Cointegration Study", International Review of Financial Analysis, 5, 1, pp 39-53.

Bekaert, G. and Harvey, C. R. (1995), “Time-Varying World Market Integration,” Journal of Finance, 50, pp. 403–44.

Bekaert, G. and Harvey, C. R. (1995), “Emerging Equity Market Volatility,” NBER Working Paper Series 5307.

Bessler, D.A. and Yang, J. (2003), “The Structure of Interdependence in International Stock Markets,” Journal of International and Finance, 22, pp. 261-287.

Bracker, K., Dockling, D.S. and Koch, P.D., (1999), “Economy Determinants of Evolution in International Stock Market Integration, Journal of Empirical Finance, 6, pp 1-27. Brailsford, Penm and Terrel, (2006), “An Analysis of Asian Market Integration Pre-and Post-Crisis,” International Journal of Theoretical and Applied Finance, 9, pp. 483–501. Chan, K. C., Gup, B. E. and Pan, M. (1992), “An Empirical Analysis of Stock Prices in Major Asian Markets and the United States,” Financial Review, 27, pp. 289–307.

Chen, G.M., Firth, M. and Meng, O.R. (2002), “Stock Market Linkages: Evidence from Latin America,” Journal of Banking and Finance, 26, pp. 1113-1124.

Choudhry, T. (1996), “Interdependence of Stock Markets: Evidence from Europe During the 1920s and 1930s,” Applied Financial Economics 6, pp. 243-149.

Chowdhury, A. R. (1994), “Stock Market Interdependencies: Evidence from the Asian NIEs," Journal of Macroeconomics,16, pp. 629-651.

Chung, P. and Liu, D. (1994), “Common Stochastic Trends in Pacific Rim Stock Markets,” Quarterly Review of Economics and Finance, 34, pp. 241-259.

Daly, K.J., (2003), “Southeast Asian Stock Market Linkages: Evidence from Pre- and Post-October 1997,” ASEAN Economic Bulletin, 20, pp. 73-85.

DeFusco, R. A., Geppert, J.M. and Tsetsekos, G.P. (1996),“Long-run Diversification Potential in Emerging Stock Markets,” Financial Review, 31, pp. 343-363.

Dekker, A., Sen, K. and Young, M., (2001, “Equity Market in the Asia Pacific Region: A Comparison of the Orthogonalized and Generalized VAR Approaches,” Global Finance Journal, 12, pp. 1–33.

Enders, W. (1995), Applied Economic Time Series, John Wiley &Sons, Inc.: New York.

Engle, R.F. and Granger, C.W.J. (1987), “Co-integration and Error Correction: Representation, Estimation, and Testing,” Econometrica, 55, pp. 251-276.

Eun, C. S and Shim, S. (1989), “International Transmission of Stock Market Movements", Journal of Financial and Quantitative Analysis, 24, pp. 241-256.

Fatzaz, A and Ayaz, A. (2001), “Stock Price Co-movements in Emerging Markets,” Pakistan Journal of Applied Economics, 17, pp. 1-17.

Francis, I., Kim, S. and Yoon, J.H. (2002), “International Stock Market Linkages: Evidence from the Asian Financial Crisis,” Journal of Emerging Market Finance, 1, pp. 1-29.

Fuller, W.A. (1976), “Introduction to Statistical Time Series,” John Wiley and Sons :New York:.

Ghosh, A., Saidi, R. and Johnson, K. (1999), “Who Moves the Asia-Pacific Stock Markets–US or Japan? Empirical Evidence Based on the Theory of Cointegration,” Financial Review, 34, pp. 159–70.

Gonzalo, J., (1994), “Five Alternative Methods of Estimating Long-Run Equilibrium Relationships,” Journal of Econometrics, 60, pp. 203-233.

Grubel, H. (1968), “International Diversified Portfolio: Welfare Gains and Capital Flows”, American Economic Review,” 58, pp. 1299-1314.

Granger, C. W. J. (1988), “Some Recent Developments in A Concept of Causality", Journal of Econometrics, 39, pp. 199-211.

Hassan, M. Kabir. and Naka, Atsuyuki (1996), “Short-run and Long-run Dynamic Linkages Among International Stock Markets," International Review of Economics and Finance, 5, pp. 387-405.

Huang, B.N., Yang, C.W. and Hu, J.W.S. (2003), “Causality and Cointegration of Stock Markets among the United States, Japan and the South China Growth Triangle,” International Review of Financial Analysis, 9, pp. 281-297.

Hung, B. and Cheung, Y. (1995), “Interdependence of Asian Emerging Equity Markets,” Journal of Business Finance and Accounting, 22, pp. 281–88.

Hwahsin, C. and Glascock, J.L. (2006), “Stock Market Linkages Before and After the Asian Financial Crisis: Evidence from Three Greater China Economic Area Stock Markets and the US,” Review of Pasific Basin Financial Markets and Policies, 9, pp. 297-315.

Ibrahim, M.H. (2005), “International Linkages of Stock Prices: The Case of Indonesia, Management Research News, 28, 4, pp. 93-115.

Janakiramanan, S. and Lamba, A. S. (1998), “An Empirical Examination of Linkages Between Pacific-Basin Stock Markets,” Journal of International Financial Markets, Institutions and Money, 8, pp.155–73.

Johansen, J. and Juselius, K., (1990), “Maximum Likelihood Estimation and Inference on Cointegration—With Applications to the Demand for Money,” Oxford Bulletin of Economics and Statistics, 52, pp. 169– 210.

Koch, P. D. and Koch, T. (1991), “Evolution in Dynamic Linkages Across Daily National Stock Indexes", Journal of International Money and Finance, 10, pp. 231-251.

Koop, G., Pesaran, M.H. and Potter, S.M. (1996), “Impulse Response Analysis in Nonlinear Multivariate Models,” Journal of Econometrics, 74, pp. 119-147.

Laurence, M., Cai, F. and Qian, S. (1997), “Weak-Form Efficiency and Causality Tests in Chinese Stock Markets,” Multinational Finance Journal, 1, pp. 291-307.

Leong, S.C. and Felmingham, B. (2003), “The Interdependence of Share Markets in the Developed Economies of East Asia,” Pacific-Basin Finance Journal, 11, pp. 219–237.

Lee, S.B. and Kim, K.J. (1993), “Does the October 1987 Crash Strengthen the Co-Movements among National Stock Markets,” Review of Financial Economics, 3, pp. 89-102.

Levy, H. and Sarnat, M. (1970), “International Diversification of Investment Portfolios,” American Economic Review, 60, pp. 668-675.

Masih, A. M. M. and Masih, R. (1997), “Dynamic Linkages and the Propagation Mechanism Driving Major International Stock Markets,” Quarterly Review of Economics and Finance, 37, pp. 859–85.

Masih, A. M. M. and Masih, R. (1999), “Are Asian Stock Market Fluctuations Due Mainly to Intra-Regional Contagion Effects? Evidence Based on Asian Emerging Stock Markets,” Pacific- Basin Finance Journal, 7, pp. 251–82.

Masih, R. and Masih, A. M. M. (2001), “Long and Short Term Dynamic Causal Transmission Amongst International Stock Markets,” Journal of International Money and Finance, 20, pp. 563–87.

Mtchell, R. (2006), “International Diversification Benefits of Latin American Sector Investments,” Journal of Emerging Markets, 11, pp. 50-58.

Nelson, C.R. and Plosser, C.I. (1982), “Trend and Random Walks in Macroeconomic Time Series: Some Evidence and Implications,” Journal of Monetary Economic, pp. 139-162.

Ng, A. (2000), “Volatility Spillover Effects from Japan and the US to the Pacific-Basin,” Journal of International Money and Finance, 19, pp. 207–33.

Ng, T.H. (2002), “Stock Market Linkages in South-East Asia,” Asian Economic Journal, 16, pp. 353-377.

Palac-MicMiken, E.D. (1997), “An Examination of ASEAN Stock Markets: A Cointegration Approach,” ASEAN Economic Bulletin, 13, pp. 299-311.

Park, J. and Fatemi, A. M. (1993), “The Linkages Between the Equity Markets of Pacific-Basin Countries and Those for the U.S., U.K., and Japan: A vector Autoregression Analysis", Global Finance Journal, 4, pp. 49-64.

Pesaran, M. H. and Shin, Y. (1998), “Generalized Impulse Response Analysis in Linear Multivariate Models,” Economics Letters, 58, pp. 17–29.

Phylaktis, K. And Ravazzolo, F. (2005), “Stock Market Linkages in Emerging Markets: Implications for International Portfolio Diversification,” Journal of International Financial Markets, Institutions and Money, 15, pp. 91-106.

Robert, P.B. and Jansen, W.J., (2005), “Comovement in International Equity Markets: A Sectoral View,” Journal of International Money and Finance, 24, pp. 832-857.

Roca, E.D., Selvanathan, E.A. and Shepherd, W.F. (1998), “Are the ASEAN Equity Markets Interdependent,” ASEAN Economic Bulletin,15,pp. 109– 120.

Said, S.E. and Dickey, D.A. (1984), “Testing for Unit Roots in Autoregressive Moving Average Models of Unknown Order,” Biometrika, 71, pp. 599-607.

Sheng, H. and Tu, A. (2000), “A Study of Cointegration and Variance Decomposition among National Equity Indices Before and During the Period of the Asian Financial Crisis,” Journal of Multinational Financial Management, 10, pp. 345–65.

Siklos, P.L., (2001), “Integration Among Asia-Pacific and International Stock Markets: Common Stochastic Trends and Regime Shift,” Pacific Economic Review, 6, pp. 89-110.

Solnik, B.H. (1974), “Why nor diversify Internationally,” Financial Analysts Journal, 30, pp. 48-54. Stock, J.H. and Watson, M.W. (1998), “Testing for Common Trend,” Journal of American Statistical Association, pp. 1097-1107.

Toda, H.Y. and Phillips, P.C.B. (1993), “Vector Autoregressions and Causality,” Econometrica, 61, pp. 1367-1393.

Yang, J., Kolari, J.W. and Min, I., (2003), “Stock Market Integration and Financial Crisis: the Case of Asia,” Applied Financial Economics, 2003, 13, pp.477-486.

Yusof, R.M. and Majid, M.S.A. (2006), “Who Moves the Malaysian Stock Market – the US or Japan? Empirical Evidence from the Pre-, During, and Post-1997 Asian Financial Crisis,” Gadjah Mada International Journal of Business, 8, pp. 367-406.

Wei, K.C. J., Liu, Y.J., Yang, C.C., and G.S. Chaung, (1995), “Volatility and Price Change Spillover Effects Across the Developed and Emerging Markets,” Pacific-Basin Finance Journal, 3, pp. 113-136.