The Relationship Between Stock Markets Of Major Developed Countries And Asian Emerging Markets

The Relationship  Between  Stock Markets Of Major Developed Countries  And  Asian Emerging  Markets
Authors : WING-KEUNG WONG, JACK PENM, RICHARD DEANE TERRELL, KAREN YANN CHING LIM

Abstract :

With the emergence of new capital markets and liberalization of stock markets  in  recent  years, there has been an increase in  investors’  interest  in  international diversification.  This  is so because international diversification allows investors to have a larger basket of foreign securities to choose from as part of their portfolio assets, so as to  enhance the reward-to-volatility ratio.   This  benefit would  be limited if national equity markets tend to move together in the long run.  This paper thus studies the issue of co-movement between stock markets in major developed countries and those in Asian emerging markets using the concept of cointegration.  We find that there is co-movement between some of the developed and emerging markets, but  some emerging markets do differ from the developed markets with  which they share a long-run equilibrium relation- ship. Furthermore, it has been observed that there has been increasing interdependence between most of the developed and emerging markets since the 1987 Stock Market Crash. This interdependence intensified after the 1997 Asian Financial  Crisis.  With this phenomenon of increasing co-movement  between  developed and emerging stock markets, the benefits of international diversification become limited.
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