Financial Integration and International Portfolio Diversification: US, Japan and ASEAN Equity Markets

Abstract

ABSTRACT The paper empirically analyzes financial integration and the benefits of international diversification across US, Japan and ASEAN equity markets. Our results suggest no evidence of cointegration among (1) ASEAN markets, (2) an individual ASEAN market, the US and Japanese markets, and (3) ASEAN markets, the US and Japanese markets. However, results from impulse-response functions indicate immediate responses of each ASEAN market to innovations in other ASEAN markets, as well as to innovations in the US and Japanese markets. Among the ASEAN markets, the Indonesian market seems relatively isolated; the Malaysian market is most influential, followed by the Singapore equity market. The US market is found to be more dominant than the Japanese market. Our results suggest potential benefits of international portfolio diversification across these markets for investors that have long-term investment horizons. However, the short term gains may be limited, especially to investors from the US.