Regional integration of emerging stock markets in Asia: Implications for international investors

Abstract

Recent years have seen an increasing trend towards regionalism in pursuing economic goals of a country. Through this phenomenon, countries within a region are moving closer to each other at a much faster rate. Several researchers argue that strong economic ties between countries have direct implications on their stock markets and cause a greater degree of comovement among them. Such market integration is vital from the viewpoint of international portfolio investors as integrated markets get affected with innovations in other markets, thereby reducing potential diversification benefits. This article examines the extent of integration between stock markets of six prominent emerging economies in Asia, China, India, South Korea, Thailand, Malaysia, and Indonesia by employing Vector Autoregression (VAR) methodology. The results indicate that within the Asian region, all the emerging markets do not form a single homogeneous set even though they are largely affected by their own innovations. We find that some Asian markets are relatively isolated while others more integrated. The integration of Asian economies and therefore stock markets is still evolving, and to that effect the region still provides portfolio diversification benefits to global investors.