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International Diversification Benefits in ASEAN Stock Markets: a Revisit

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Author Info
Kian-Ping Lim (Universiti Malaysia Sabah)
Hock-Ann Lee (Universiti Malaysia Sabah)
Venus Khim-Sen Liew (Universiti Putra Malaysia)

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Abstract

With plentiful of evidence supporting the presence of non-linearity in stock returns series, coupled with theoretical and empirical works suggesting a potential loss in standard Johansen cointegration method if the underlying data generating process is non-linear in nature, this study re-examines the issue of stock markets integration in the ASEAN region using a more robust test. Specifically, the Bierens’s (1997) non- parametric cointegration test is selected in views of its potential superiority over standard linear Johansen and Juselius (1990) method at detecting cointegration when the data generating process is non-linear. The results from the Bierens’s test indicate that there is a common force which brings all the five ASEAN stock markets together in the long run. In this case, the shocks from any of these five markets may spillover to the other markets in the same region. The recent Asian financial crisis bears a good testimony to this ‘contagion effect’. More importantly, the Bierens’s (1997) non-parametric cointegration test provides robust evidence suggesting that there would be no long run gain from international portfolio diversification. Specifically, investors with long run horizons may not benefit from an investment made across the countries in this ASEAN region. One possible explanation for this intra-ASEAN stock markets integration is their strong economic ties, especially intra-ASEAN trade and investment that has indirectly linked their stock indices.

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Paper provided by EconWPA in its series Finance with number 0308003.

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Date of creation: 03 Aug 2003
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Handle: RePEc:wpa:wuwpfi:0308003

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Related research
Keywords: Stock market integration; Portfolio diversification; Non- parametric cointegration test; ASEAN stock markets. foreign exchange markets; ASEAN stock markets.;

Find related papers by JEL classification:
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing

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