Stock Market Integration and Portfolio Diversifications in the ASEAN Economic Community (AEC): A Thai Perspective

Abstract

This paper has two objectives. First, we examine the dynamic patterns of interdependence among six stock markets in the ASEAN Economic Community (AEC). The Dynamic Conditional Correlation (DCC) – GARCH model is used to generate time-varying cross-country correlations in stock returns. The results exhibit the time-varying behavior in both conditional variances and correlations. In addition, these cross-country conditional correlations are increasing over time in every case. Second, we investigate benefits of international portfolio diversification in ASEAN Exchange from a Thai perspective. The results show that performance of international diversify portfolios could vary over time. However, ability of the DCC-GARCH model to quickly update information on impact of market volatility could provides better information in optimization process. As a result, overall performance of portfolios using conditional correlation generated by the DCC-GARCH model is significantly better than simple portfolio with moving-average correlation. Therefore, financial liberalization process under the AEC framework provided an opportunity for a Thai investor to extract gain from international diversification.