Cointegration of Stock Markets in East Asia in the Boom and Early Crisis Period

Abstract

For both risk management and portfolio selection purposes, modeling the linkage across financial markets is crucial, especially among neighboring stock markets. In investigating the dependence or co-movement of four or more stock markets in different countries, researchers frequently use co-integration and causality analysis. Nevertheless, they conducted the causality in mean tests but not the causality in variance tests. This paper examines the co-integration and causal relations among five major stock exchanges in East Asia, i.e Shangai Stock Exchange, Tokyo Stock Exchange, Osaka Stock Exchange, Hong-Kong Stock Exchange and Korean Stock Exchange. It employs the recently developed techniques for investigating unit roots, co-integration, time-varying volatility, and causality in variance