۱- Introduction

۲- Literature review

۳- Methodology

۴- Data

۵- Empirical analysis

۶- Conclusion and implications

References

Abstract

This study explores the issue of financial integration among stock markets of ASEAN5 economies, plus China (mainland China and Hong Kong), Japan and South Korea (referred to as ASEAN5+4). Using both graph theory and a Vector Autoregressive (VAR)-based method, together with a rolling window approach, we show that the level of interconnectedness among these markets is high but with clear time varying patterns. A large share of this seemingly high level of integration is shown to be driven by common global factors. After filtering these factors from each stock market, the magnitude of interconnectedness falls substantially. Our results therefore suggest that stock market integration in East and Southeast Asia is not as strong as it looks. Although governments in this region have been promoting financial market collaboration and integration, barriers remain significant. The overestimated interconnectedness is mainly a simple reflection of stronger global influences on individual markets, while their interconnectedness attributable to non-global factors shows a descending trend after the crisis.

Introduction

Asian stock markets are increasingly integrated in recent years (Chien, Lee, Hu, & Hu, 2015), accompanied by joint policy efforts on building up a regionally integrated market to promote capital mobility within the region, such as the AEC Blueprint series (ASEAN, 2015). According to the 2018 Asian Economic Integration Report (ADB, 2018), Asia’s share of global inward foreign direct investment has shown an increasing trend in recent years, for example, rising from 27.8% in 2016 to 36.2% in 2017. An upward trend is also seen in international holdings of Asian portfolio equity assets, rising by 1.3 trillion USD in 2017. This year also witnessed a surge of global remittances to Asia amounting to 272.5 billion USD, concurrent with strengthened global economy. Regional stock market integration was found reinforced during the turmoil of the global financial crisis (Gupta & Guidi, 2012). For the post-crisis period, while some studies find evidence of declining co-movement among certain Asian stock markets (Gupta & Guidi, 2012), others find strengthened linkages among major East Asian stock markets (Wang, 2014). Capital market liberalization and globalization largely contribute to Asian stock market integration (Arouri & Foulquier, 2012). With ongoing financial market deregulation and capital account liberalization, cross-border financial transactions are more prevalent (Chien et al., 2015; Singh, 2009). Massive inflows of foreign investment contribute substantially to the boom of local equity markets in this region. Market capitalization of major Ease and Southeast Asian stock markets grows substantially during the last two decades. For example, the market value rises 6.51 times for Hong Kong, 9.48 times for Indonesia, 6.06 times for the Philippines, and a whopping 61.13 times for China’s Ashare market, with its Shanghai stock Exchange being the fourth largest in the world by the end of 2018.1 East and Southeast Asian stock markets have become an important part of fund managers’ international portfolios for the purposes of increasing returns and reducing risks (Narayan, Sriananthakumar, & Islam, 2014). On the other hand, the global stock market exerts increasingly significant influences on Asian markets (Burdekin & Siklos, 2012; Huyghebaert & Wang, 2010). There is no doubt that the trend of globalization will inevitably lead to significantly increased stock market co-movement and stronger linkages in capital markets arising from potential spillover effects. It is, however, questionable how strong Asian equity markets are interlinked in the absence of common global factors.