Abstract
This paper examines the financial cointegration and spillover effect of the global financial crisis to emerging Asian financial markets (India, China, Pakistan, Malaysia, Russia and Korea). The analysis used daily stock returns, divided into three time periods: pre-, during and post-crisis from 1 July 2005 to 30 June 2015. We applied the Johansen and Juselius cointegration test, the vector error correction model (V.E.C.M.) and the G.A.R.C.H.-B.E.K.K. model for an examination of integration and conditional volatility. We find long-term cointegration between the U.S. market and emerging stock markets, and the level of cointegration increased after the crisis period. The V.E.C.M. and impulse response function reveal that a shock in the U.S. financial market has a short-term impact on the returns of emerging financial markets. Past shocks and volatility have more effect on the selected stock markets during all time periods. The Korea Composite Stock Price Index and the Bombay stock exchange (B.S.E.) are the only stock markets that have cross-market news and volatility spillover effects during the crisis period. After the crisis period, news effects are positive on the B.S.E. and the Russian Trading System and have a negative effecton the Kuala Lumpur Stock Exchange and the Shanghai Stock Exchange.
Highlights
In the 1900s the financial liberalisation of capital inflow and the stock markets was followed by a boom in the number of cross-border transactions of currencies and securities
We find that the number of cointegration equations increased after the crisis time period, which is similar to the findings of Yang et al (2003) and Dooley and Hutchison (2009) for emerging stock markets
From the results for the G.A.R.C.H.-B.E.K.K. model we find that there are only two stock markets, the K.O.S.P.I. and the B.S.E., that are affected by shock spillover and volatility spillover from the N.Y.S.E. during the crisis period
Summary
In the 1900s the financial liberalisation of capital inflow and the stock markets was followed by a boom in the number of cross-border transactions of currencies and securities. The global financial crisis of 2007–2009, which originated in the U.S financial sector due to the fall of the U.S real estate market, is the worst financial crisis after the great depression of the 1930s, and spread rapidly to almost all emerging and advanced economies (Claessens, Dell’Ariccia, Igan, & Laeven, 2010). It affected equity markets around the world, and many emerging economies observed a very sharp decline in their equity markets, greater than that of the U.S stock market. The bankruptcy of Lehman Brothers in September 2008 initiated the global financial crisis, which quickly spread to other emerging economies (Dooley & Hutchison, 2009)
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