Global and regional stock market integration in Asia: A panel convergence approach

Guglielmo Maria Caporale,Kefei You,Lei Chen

doi:10.1016/j.irfa.2019.101381

Abstract

This paper examines global and regional stock market integration in Asia at both the aggregate and disaggregate (industry) levels by applying the Phillips-Sul (2007) tests for panel and club convergence. Over both the whole sample (1998m12–2018m3) and the two sub-sample periods (i.e., pre- and post-2008 global financial crisis periods), the Asian stock markets appear to be integrated both globally (vis-à-vis the US) and regionally (vis-à-vis Asia) at the aggregate level, although the speed of convergence has decreased after the crisis. The industry level convergence tests reveals that, notwithstanding the aggregate convergence, there are 3 (i.e., Gas & Oil, Healthcare and Technology) out of 10 industries not exhibiting panel convergence in any sample period; further, no convergence is found for Basic Materials and Consumer Services in the pre-crisis period and Telecommunications and Utilities in the post-crisis period. The club convergence tests show this was due to the existence of convergence clubs, clubs in the turn-around phase, and divergent economies in these industries. Global and regional integration exhibited similar patterns in most cases, although the former appears to be stronger than the latter in the post-crisis period. We also find that trade linkages and stock market development promote Asia's regional stock market integration but not its global integration; real interest rate differentials and the recent financial crisis have slowed down both regional and global integration, while exchange rate risk and openness only affect the former.

Highlights

Cross-border financial integration is generally thought to bring benefits to an economy by lowering the costs of asset trading and offering more portfolio diversification opportunities
Club Convergence Results As argued by Phillips and Sul (2007), a rejection of full-panel convergence on the basis of the logt test does not rule out the possibility of club convergence and the presence of divergent members
This paper investigates whether the Asian stock markets are more integrated at the global or regional level after the 1997 Asian financial crisis

Summary

Introduction

Cross-border financial integration is generally thought to bring benefits to an economy by lowering the costs of asset trading and offering more portfolio diversification opportunities. In this paper we employ the Phillips and Sul (2007) panel convergence method to analyse the regional and global integration for the Asian stock markets at both national and industry level, paying special attention to the pre- and post-2008 crisis period. Hinojales and Park (2011) have done so, their analysis is restricted to three industries and based on correlations only; Apergis et al (2014) and Tam and Tam (2012) cover more industries but the Asian countries are included in a large group of both developed and developing economies and neither analyse global versus regional integration in Asia None of these three studies evaluates the impact of the 2008 global financial crisis on the integration process. Information on the post-crisis convergence process obtained through the Phillips and Sul method can provide valuable information to national authorities and investors for designing their policies and investment strategies respectively. 5 This method is explained in detail below

Relative Transition

Club Convergence and Clustering

Logt Test Results

Conclusions

649 Discussion