Does Global Financial Crisis Integrate the Regional Market in Asia More Strongly?

Iti Vyas,Alok Kumar Mishra

doi:10.32890/mmj.20.2016.9039

Abstract

The aim of this paper is to analyze whether the worldwide financial crisis integrates the regional markets in Asia more strongly. Secondly, it is also to examine whether the integration of regional markets in Asia necessarily leads to a weak form of market efficiency. To examine this we have considered the different broad based and liquid stock indices such as the Sensex and BSE 100 from the Bombay Stock Exchange; the S&P CNX Nifty from the National Stock Exchange, representing India; the Hang Seng Index from the Hong Kong Stock Exchange, representing China; the Kuala Lumpur Composite Index (KLSE), Bursa Malaysia representing Malaysia; the Nikkei 225 from the Tokyo Stock Exchange representing Japan, and the Straits Times Index (STI) from the Singapore Exchange representing Singapore. The study considered the daily data spanning from 4th January 1994 to 2nd May 2012. The full sample period was split into three forms such as the whole sample, the Global financial crisis and the post global financial crisis. The short term interaction was studied by using Toda Yamamoto’s procedure of Granger’s Causality in VAR Block Exogenity form and the long run equilibrium relationship was tested by applying the Johansen Maximum Likelihood procedure. And so the paper explored the possible, integrating relationship at the volatility level among the regional stock indices by applying the ARCH school of models. Finally, the Random Walk Hypothesis was tested by employing the Chow-Denning (1993) and the Lo and Mackinlay (1988) multiple variance ratio test to examine the efficiency of the market. The major findings of the study indicated that the worldwide financial crisis integrates the regional markets in Asia more strongly in the short term from 2007 onwards. There is no long run equilibrium relationship among the regional stock markets. The study also found that the integration of the financial market does not necessarily contribute to market efficiency.

Highlights

Regional integration is considered a major boost to the global integration process
With a view to examine the integration of the Indian stock market with the regional stock markets, we have considered the different broad-based and liquid stock indices such as the Sensex and BSE 100 from the Bombay Stock Exchange, the S&P CNX Nifty from the National Stock Exchange representing India, the Hang Seng Index from the Hong Kong Stock Exchange representing China, the Kuala Lumpur Composite Index (KLSE), Bursa Malaysia representing Malyasia, Nikkei 225 from the Tokyo Stock Exchange representing Japan, the Straits Times Index (STI) from the Singapore Exchange representing Singapore
The pairwise Granger’s causality result surmised that there exists consistent short-term causality between the regional stock markets during the global financial crisis and the postglobal financial crisis period in comparison to the entire period of the study. This may be due to the fact that the global financial crisis integrates the regional markets in Asia more strongly in the short term from 2007 onwards

Summary

Introduction

Regional integration is considered a major boost to the global integration process. Apart from Asia’s growing integration with the rest of the world, increasing integration within Asia reflects the growing intraregional trade and financial flows. The South East Asian Crisis of 1997 has turned out to be an opportunity in the pan-Asian region to begin the regional monetary and financial cooperation. The major initiatives for regional cooperation in Asia includes ASEAN+3, the Chiang Mai Initiative, the Executive’s meeting of East Asia-Pacific Central Banks, Asia Bond market initiatives, Asian bond fund, etc. ASEAN has embarked on a process to expand economic cooperation with its neighbors in the north, namely China, Japan and South Korea (ASEAN+3). Financial market integration has become significant in the recent period as capital has become more mobile across countries with reduction in capital controls and improvement in technical infrastructure. As a consequence of which, there is an increase in co-movements of interest rates, bond issues and equity indices

Objectives

Methods

Findings

Conclusion