Does the East and Southeast Asian Equity Market have Integration? A Study of Cointegration Analysis

Refki Ardy Prasetya,Research Scholar, School Of Business And Management, Itb, Bandung

doi:10.47191/ijcsrr/v5-i3-07

Refki Ardy Prasetya, Research Scholar, School Of Business And Management, Itb, Bandung

Open Access

https://doi.org/10.47191/ijcsrr/v5-i3-07

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Abstract

Financial integration can improve the efficiency of capital allocation as well as help diversify risks. This study aims to find and analyze four cases. First, to find and analyze the long-term cointegration between East and Southeast Asian. Second, to find and analyze the short-term causal relationship between East and Southeast Asian equity market. Third, to find the most influential equity market from East Asian toward their Southeast Asian and the most influential equity market from Southeast Asian toward their East Asian. Last, to find the forecast structural analysis for five days horizon period of each country’s price, both East and Southeast Asia. This study uses Johansen’s cointegration method to test long-run relationships between East and Southeast Asian equity markets, Granger-causality, forecast variance decomposition method and forecast with VECM. This study uses daily indices prices collected from Refinitive covered from January 2002 to December 2019. Johansen’s test emphasize that there is a cointegration relationship between East Asian and Southeast Asian stock markets, but the integration process is incomplete. The cointegration vector also emphasize that ASEAN+3 members react differently to external shocks. This study found that the Japan Granger-cause will lead to all stock markets in Southeast Asia, while Singapore and Philippine Granger-cause will lead to all stock markets in East Asia. These results show that Japan is the market with the most connections in Southeast Asia, while Singapore and Philippine are the markets with the most connections in East Asia. Another point of this paper is to emphasize that Japan is the most influential stock market in East Asia, while Singapore is the most influential stock market in Southeast Asia. This study shows that policymakers in East and Southeast Asian countries should synchronize capital market standards, regulations and reduce barriers to capital flow to stimulate the integration of regional stock markets.

Highlights

Financial globalization can be defined as a trend characterized by increasing the integration of capital markets and international financial transactions [1]
This study shows that policymakers in East and Southeast Asian countries should synchronize capital market standards and regulations and reduce barriers to capital flow to stimulate the integration of regional stock markets
The shortcomings of [37] method may result in a biased simultaneous equation, because it may fail to recognize the causal direction among equity markets in Asia besides that the Engle and Granger method cannot detect more than one cointegration equation in the case of multivariate cointegration so that is the weakness causes the inability to verify that the integration process in ASEAN+3 has reached its maximum completion or not

Summary

INTRODUCTION

Financial globalization can be defined as a trend characterized by increasing the integration of capital markets and international financial transactions [1]. The results of the study, Johansen's test emphasize that there is a cointegration relationship between East Asian and Southeast Asian stock markets, but the integration process is incomplete. Even if these variables depart from the equilibrium level due to some short-run disturbance, with time, the degree of variation of the variable will gradually decrease and the variable will return to the general equilibrium level In this case, the shortcomings of [37] method may result in a biased simultaneous equation, because it may fail to recognize the causal direction among equity markets in Asia besides that the Engle and Granger method cannot detect more than one cointegration equation in the case of multivariate cointegration so that is the weakness causes the inability to verify that the integration process in ASEAN+3 has reached its maximum completion or not. The smaller the MSE and MAPE values, the more accurate the forecast results obtained [34]

RESULT

12 ResponseofSETtoVNI 12

Findings

CONCLUSIONS