East Asian Equity Research Articles

Return and volatility connectedness and net directional patterns in spillover transmissions: East and Southeast Asian equity markets

AbstractIn this article, we investigate the pattern and dynamics of return and volatility connectedness across East and Southeast Asian markets (referred to as the ASEAN5 + 5 group) by utilizing forecast‐error variance decompositions in a generalized VAR framework in conjunction with the Bai‐Perron procedure to control for structural breaks. Our analysis of the dynamics of return spillovers in static and time‐varying settings identifies that the stock markets of Singapore, Hong Kong and South Korea act as constant and largest net transmitters of shocks throughout the period from January 2003 to July 2021. The Chinese stock market is found to have the lowest return connectedness with other regional markets, which could be due to the local foreign ownership regulations. Visualization of the net pairwise return spillover network shows that Singapore is the sole net transmitter of shocks to all other markets in the ASEAN5 + 5 group, whereas, China, despite its market size is the sole net recipient. Two other markets in the regional group are identified as the net receivers, Japan and the Philippines, with the former becoming a net recipient from 2007. Our analysis of structural breaks shows that return spillovers across the markets intensify during periods of economic turmoil, financial shocks and the health crisis (COVID‐19), however, return to the pre‐shock levels during stable market periods. Further analysis of time‐varying patterns revealed that the dynamic connectedness across the region is not symmetrical and the influence of negative returns is more pronounced. The investigation of volatility spillovers shows no substantial differences. The stock markets generally retain their roles. Importantly, the time‐varying volatility connectedness exhibits similar patterns and tends to reach peak levels during turbulent episodes.

Return and Volatility Connectedness and Net Directional Patterns in Spillover Transmissions: East and Southeast Asian Equity Markets

Return and Volatility Connectedness and Net Directional Patterns in Spillover Transmissions: East and Southeast Asian Equity Markets

Under-pricing of South and East Asian IPOs: An investigation of the relevance of governance quality in closely controlled companies

In this paper, we investigate the impact of national governance quality on the under-pricing of initial public offerings (IPOs) in developing South and East Asian equity markets. A significant feature of many listed companies in these markets is the dominant control position of insider shareholders or family groups. We therefore explore the issue of concentrated control when assessing the extent of under-pricing. Concentrated control implies a significant deviation between proportionate ownership and control of company assets. We demonstrate that governance quality is related to IPO under-pricing, contrary to previous research findings on developing markets. This finding is restricted to companies not associated with concentrated control. We use two proxies to identify concentrated control. We initially use the percentage of management control rights. We use company value as an alternative proxy. Our results indicate that the ‘reduced monitoring’ explanation does apply in developing markets, when we allow for the impact of concentrated control.

Does the East and Southeast Asian Equity Market have Integration? A Study of Cointegration Analysis

Financial integration can improve the efficiency of capital allocation as well as help diversify risks. This study aims to find and analyze four cases. First, to find and analyze the long-term cointegration between East and Southeast Asian. Second, to find and analyze the short-term causal relationship between East and Southeast Asian equity market. Third, to find the most influential equity market from East Asian toward their Southeast Asian and the most influential equity market from Southeast Asian toward their East Asian. Last, to find the forecast structural analysis for five days horizon period of each country’s price, both East and Southeast Asia. This study uses Johansen’s cointegration method to test long-run relationships between East and Southeast Asian equity markets, Granger-causality, forecast variance decomposition method and forecast with VECM. This study uses daily indices prices collected from Refinitive covered from January 2002 to December 2019. Johansen’s test emphasize that there is a cointegration relationship between East Asian and Southeast Asian stock markets, but the integration process is incomplete. The cointegration vector also emphasize that ASEAN+3 members react differently to external shocks. This study found that the Japan Granger-cause will lead to all stock markets in Southeast Asia, while Singapore and Philippine Granger-cause will lead to all stock markets in East Asia. These results show that Japan is the market with the most connections in Southeast Asia, while Singapore and Philippine are the markets with the most connections in East Asia. Another point of this paper is to emphasize that Japan is the most influential stock market in East Asia, while Singapore is the most influential stock market in Southeast Asia. This study shows that policymakers in East and Southeast Asian countries should synchronize capital market standards, regulations and reduce barriers to capital flow to stimulate the integration of regional stock markets.

Financial integration of Asian markets: multivariate cointegration, causality and variance decomposition

The aim of this paper is to study financial integration of East Asian equity markets. We conduct a multivariate cointegration analysis using the Engle-Granger test to determine the presence of a long-term equilibrium relationship between the different equity indices. The Granger procedure defines the meaning of causality. Vector autoregression helps to model the dynamic relationships between the different markets. Forecast error variance decomposition captures much of the information on the dynamics of the indices' VAR system and allows for checking the relative contribution of each shock in explaining price movements. The results indicate that there are long-term stationary equilibrium relationships and causal links between these markets. The results on the forecast error variance decomposition show that the price indices of emerging Asian countries can explain their caused variance and confirm that financial integration prevails in the region.

News and expected returns in East Asian equity markets: The RV-GARCHM model

Using intraday data to construct realized variance estimates combined with daily data on equity returns from January 1996 to May 2017, equity markets in East Asia are found to be relatively more risky than other markets. The framework uses an intertemporal capital asset pricing model with conditional moments based on realized volatility and a GARCH-in-mean specification to study the impact of news. Significant non-linear dynamics are also identified, with a positive relationship between expected returns and news associated with small shocks, and a negative relationship for large shocks. A similar relationship is found for the Australian market, but not for the US and UK equity markets.

Dynamics of integration in East Asian equity markets

This paper investigates the dynamics of integration in East Asian equity markets between 1995 and 2013 using a smooth-transition correlation GARCH model. Our results show that East Asian equity market integration among China and other countries has increased significantly since 2007, whereas among other East Asian equity markets excluding China increased significantly in an earlier period from 1999 to 2001. Additionally, we find that increasing integration has been mostly caused by correlation increases in after-trading hours. These results suggest that stock prices in East Asia are sensitive to Europe and US stocks because Europe and US investors are actively investing in East Asian stocks. Indeed, the periods reflect striking increases in integration that correspond approximately to the start of intensive Europe and US investment activity in East Asian stock markets.

Integration between East and Southeast Asian equity markets

Purpose – This paper aims to seek to find answers to three questions. First, is there any possibility of long-term cointegration between East and Southeast Asian equity markets? If so, how many cointegrating equations are there? Second, what are the short-term causal relationships between equity markets in East and Southeast Asia? Third, what is the East Asia’s most influential equity market toward their Southeast counterparts, and vice versa? Design/methodology/approach – This study uses Johansen's (1988) cointegration method to test long-run relationships among East and Southeast Asian equity markets. With regards to short-run causal relationships, this study uses Granger-causality test as well as the forecast variance decomposition method. Findings – Johansen test proves that there is cointegration between East and Southeast Asian equity markets, but the integration process is not complete. Cointegrating vector also provides evidence that member countries of ASEAN+3 respond differently to external shocks. With regards to short-run causal direction, this study finds that Japan Granger-causes all equity markets in Southeast Asia, while Singapore and Vietnam Granger-cause all equity markets in East Asia. These results imply that Japan is the market with most linkages in Southeast Asia, while Singapore and Vietnam are the markets with most linkages to East Asia. Furthermore, forecast variance decomposition reveals that Japan is the East Asia’s most influential equity markets, while Singapore is the most influential equity market in Southeast Asia. This study suggests that policymakers in East and Southeast Asian countries to synchronize the capital market standards and regulations as well as to reduce the barriers for capital mobility to spur the regional equity market integration. Research limitations/implications – Increasing integration of East and Southeast Asian capital markets forces policymakers in ASEAN+3 countries to synchronize monetary policies, as it has been found that regionally integrated capital markets reduce the degree of independent monetary policy (Logue et al., 1976). It is therefore important for policymakers in East and Southeast Asian countries to assess the possibility of stock market integration within this region to anticipate the future risks associated with economic integration as well as to build collective regional institutions (Wang, 2004). Click and Plummer (2005) also argued that integrated stock markets is more efficient than nationally segmented equity markets, and the efficiency of Asian capital markets has been questioned in particular after the 1997 Asian financial crises. Yet, the empirical evidence on the extent of financial integration among ASEAN+3 member countries has been limited and inconclusive. This study is therefore an attempt to investigate the recent development of ASEAN+3 equity markets integration. Practical implications – This study focuses its attention on the existence and the extent of financial integration in East and Southeast Asia region, and it provides evidence that equity market integration in ASEAN+3 is far from complete, and for that reason, there is a need for policymakers in ASEAN+3 member countries to synchronize their standards and regulations. Furthermore, the policymakers in East and Southeast Asia can gain benefit from this study, as it provides the evidence that ASEAN+3 member countries respond differently to policy shocks, which may hinder the development of regional financial integration as well as the policy effectiveness of region-wide authority in ASEAN+3. Originality/value – This research is different from previous studies, as it puts the regional financial integration within the context of ASEAN+3 frameworks. Unlike previous research that considers East and Southeast Asian countries as an individual entity, this research considers East and Southeast Asia into two different blocks, following Tourk (2004) who documented that negotiation process for ASEAN+3 financial integration is conducted in sub-regional level (ASEAN vs East Asia), rather than national level (country per country basis). Second, this study covers the period after the 1997 Asian financial crisis. As suggested in Wang (2014), that the degree of stock market integration tends to change around the periods marked by financial crises, the updated study on Asian financial integration in the aftermath of 1997 financial crises is important to document the development of regional financial integration.

A spatial–temporal analysis of East Asian equity market linkages

This paper examines East Asian equity market linkages in and out of the Asian and global financial crises using a novel econometric approach. The market dependence structure and shock transmission mechanism are explored spatially in the time domain, thus offering new insights into the dynamic regional market linkage patterns. Results show that East Asian equity markets are characterized by linkages through significant spatial effects, crises are conducive to increased cross-border linkages especially in the case of China, and Japan is a dominant driver of market linkages in the region.

Lunar calendar effect: evidence of the Chinese Farmer's Calendar on the equity markets in East Asia

This paper examines the statistical relation between the Chinese Farmer's Calendar (CFC) and public market information in 10 East Asian equity markets during 1995–2004. CATREG and CART, two data mining techniques, are employed and the implications of the outcomes are discussed. The outcomes confirm that the CFC plays a supplementary role to market information in predicting the market rate of return. In addition to confirmation of lunar calendar effect by the CFC, CATREG outperforms in three markets: Taiwan, South Korea and Singapore. According to CART analyses, all the three markets value the funeral category of the CFC advice and this pattern coincides with the traditional wisdom of astrological knowledge. The latter two markets share the same set of CFC items while Taiwan has its own. This contrast indicates the market-dependent observance and different interpretation of the CFC items for determining an auspicious date for equity trading. The lunar calendar effect in the three equity markets is confirmed.

Financial Integration in East Asia: An Empirical Investigation

AbstractThe central objective of this paper is to empirically evaluate the degree of linkages among East Asian equity and bond markets. Using data from the IMF’s Coordinated Portfolio Investment Survey (CPIS), we find that intra‐East Asian financial asset holdings of four East Asian countries – Japan, Korea, Hong Kong and Singapore – are larger than the levels predicted by the financial gravity model. However, our analysis suggests that this result is likely to be driven by intra‐regional trade linkages and reflect those linkages. Therefore, the salient implication for regional policymakers is that they should continue to promote intra‐regional financial integration. This paper also aims to analyse the impact of three different types of country‐specific risks – political, economic and financial risks – on investment from the four countries. This analysis yields a clear positive relationship between destination‐country risk, in particular political risk, and capital inflows.

Long run Relationship among East Asian equity markets and KSE

Article history: Received October 1, 2011 Received in Revised form November, 14, 2011 Accepted 15 February 2012 Available online 5 March 2012 The dependence of various stock markets plays a vital role in diversification while selecting securities in an investor’s portfolio. This study examines interdependence among the East Asian stock markets in relation to the Karachi Stock Exchange. Monthly data ranging from 2000 to 2010 is included and tested in this paper. This relationship is tested by using descriptive statistics and correlation matrix. Data stationarity is ensured by Unit Root Test. Evidence from Granger Causality and Impulse Response Test prove no relationship between KSE and stock markets of the East Asian countries while there exists certain level of unidirectional relationship from Japan to China and from Japan to Pakistan. © 2012 Growing Science Ltd. All rights reserved.

Financial Integration in East Asia: An Empirical Investigation

The central objective of this paper is to empirically evaluate the degree of linkages among East Asian equity and bond markets. Using data from the IMF’s Coordinated Portfolio Investment Survey (CPIS), we find that intra‐East Asian financial asset holdings of four East Asian countries – Japan, Korea, Hong Kong and Singapore – are larger than the levels predicted by the financial gravity model. However, our analysis suggests that this result is likely to be driven by intra‐regional trade linkages and reflect those linkages. Therefore, the salient implication for regional policymakers is that they should continue to promote intra‐regional financial integration. This paper also aims to analyse the impact of three different types of country‐specific risks – political, economic and financial risks – on investment from the four countries. This analysis yields a clear positive relationship between destination‐country risk, in particular political risk, and capital inflows.

DETECTING SHIFT AND PURE CONTAGION IN EAST ASIAN EQUITY MARKETS: A UNIFIED APPROACH

We test for contagion between pairs of East Asian equity markets over the period 1990–2007. We develop an econometric methodology that allows us to test for both ‘shift’ and ‘pure’ contagion within a unified framework. Using both Hong Kong and Thailand as potential shock sources, we find strong evidence of both types of contagion. Therefore, during episodes of high volatility, equity returns are influenced by changes in the transmission of common shocks and additionally by the diffusion of idiosyncratic shocks through linkages that do not exist during normal times.

Extreme return–volume dependence in East-Asian stock markets: A copula approach

A copula approach is used to examine the extreme return–volume relationship in six emerging East-Asian equity markets. The empirical results indicate that there is significant and asymmetric return–volume dependence at extremes for these markets. In particular, extremely high returns (large gains) tend to be associated with extremely large trading volumes, but extremely low returns (big losses) tend not to be related to either large or small volumes.

Return and volatility spillovers among the East Asian equity markets

This article examines the extent of contagion and interdependence across the East Asian equity markets since early 1990s and compares the ongoing crisis with earlier episodes. Using the forecast error variance decomposition from a vector autoregression, we derive return and volatility spillover indices over the rolling sub-sample windows. We show that there is substantial difference between the behavior of the East Asian return and volatility spillover indices over time. While the return spillover index reveals increased integration among the East Asian equity markets, the volatility spillover index experiences significant bursts during major market crises, including the East Asian crisis. The fact that both return and volatility spillover indices reached their respective peaks during the current global financial crisis attests to the severity of the current episode.

East Asian equity markets, financial crises, and the Japanese currency

The paper studies the interactions between the US and four East Asian equity markets. The focus is on the change in the information structure/flow between these markets triggered by the 1997 Asian financial crisis. It is shown that the information structure during the crisis period is different from that in the non-crisis periods. While the US market leads the four East Asian markets before, during, and after the crisis, it is Granger-caused by these markets during the financial crisis period but not in the post-crisis sample. Further, in accordance with concerns reported in the market, the Japanese currency is found to affect these equity markets during the crisis period. The Japanese yen effect, however, disappears in the post-crisis sample. The Japanese currency effect is quite robust as it is found from both local currency and US dollar return data and in the presence of Japanese stock returns. J. Japanese Int. Economies 21 (1) (2007) 138–152.

FINANCIAL INTEGRATION IN EAST ASIAN EQUITY MARKETS

Abstract. This paper examines the degree of financial integration that exists in East Asian equity markets using the International Capital Asset Pricing Model methodology. We employ three market portfolios to test for integration: the weighted average equity index of all sample countries, the Japanese market index and the US market index. The study shows that the level of financial efficiency and the integration of sample countries is high and has improved significantly during 1991 to 2005, and they are more financially integrated within the region and with the Asian leading market (Japan) than with the world leading market (the USA).

Shift versus Traditional Contagion in Asian Markets

We test for shift contagion between pairs of East Asian equity markets over a sample including the financial crisis of the 1990’s. Employing the methodology of Gravelle et al. (2006), we find little evidence of change in the mechanism by which common shocks are transmitted between countries. Furthermore, we analyze the effects of idiosyncratic shocks and generate time-varying conditional correlations. While there clearly is significant time variation in the pair wise correlations, this is not more pronounced during the Asian crisis than it had been historically.

Shift Versus Traditional Contagion in Asian Markets

We test for shift contagion between pairs of East Asian equity markets over a sample including the financial crisis of the 1990’s. Employing the methodology of Gravelle et al. (2006), we find little evidence of change in the mechanism by which common shocks are transmitted between countries. Furthermore, we analyze the effects of idiosyncratic shocks and generate time-varying conditional correlations. While there clearly is significant time variation in the pair wise correlations, this is not more pronounced during the Asian crisis than it had been historically.