Abstract
This study examines the effect of financial crisis on the level of stock market integration. In particular, we investigated the dynamic movements of two regional stock markets, Northeast Asia and Europe during the period between January 1st, 2000 and December 31st, 2012, with particular attention placed on the global financial crisis (GFC). For this purpose, the paper employs various approaches including DCC-MGARCH, Risk Decomposition, GVAR, and CCOR models to ensure the robustness of empirical findings. The findings of this study are as follows. First, the Northeast Asian stock market remains independent from the European and global stock market movements during the sample period. Second, the European stock market shows an increasing trend of joint integration with Northeast Asian stock market. However, the level of integration is not economically significant. Third, the level of market integration between European and global stock markets had temporally increased during the GFC. However, the level returned to its pre-crisis level in the post-crisis era. The overall empirical evidence suggests that, for either European or global stock market portfolio, constructing a portfolio with Northeast Asian stock market would result in a more efficient portfolio. The results in this paper do not support the view of previous empirical studies which suggested the increased level of integration since the GFC. An increased integration is found to be only unique to the crisis period. In sum, the market integration is a dynamic process, and the financial crisis did not uniformly affect the level of stock market integration.
Highlights
The advancements in information technology, the rise of multi-national corporations, and the relief of traditional trade barriers have increased the economic linkages across countries and have facilitated the creation of regional economic cooperation
The level of market integration between European and global stock markets had temporally increased during the global financial crisis (GFC)
It is interesting to see that the Northeast Asian stock market showed a segmented trend with global stock market during the crisis period, whereas the European stock market showed an increased level of integration with global stock market
Summary
The advancements in information technology, the rise of multi-national corporations, and the relief of traditional trade barriers have increased the economic linkages across countries and have facilitated the creation of regional economic cooperation. The three countries’ combined GDP account for about 20 percent of the world’s total and 70 percent of Asia’s These three countries recognized the importance of integrated market and started to negotiate the three nations FTA. If they reach an agreement, an integrated capital market of those three main Northeast Asian countries would become a powerful economic force with the combined Gross Domestic Product (GDP) of $15.4 trillion USD, the second biggest economic force following the NAFTA ($18.6 trillion USD) and bigger than the EU ($12.1 trillion USD), and would strongly affect the world economic markets. We apply Dynamic Conditional Correlation Multivariate Generalized Autoregressive Conditional Heteroskedasticity (DCC-MGARCH), Risk Decomposition, Generalized Variance (GVAR), and Collective Correlation (CCOR) models to reflect a time-varying integration process and to measure an overall level of aggregate market integration. The argument is not convincing as it stands because the sample data for the post-crisis period were not sufficient enough to fully reflect the effect of crisis on the level of market integration
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