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The Co-Movements of the Regional Stock Markets and Some Implications on Risk Diversification

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  • Maran Marimuthu

Abstract

: As risk diversification is the main concern for most investors, they tend to look into the possibility of broadening their investment activities across the countries or creating a region-based investment policy. This requires the understanding of regional and global linkages of stock markets. Specifically, this study makes an attempt to re-examine the co-movements among the Malaysian, Indian and Chinese equity markets. This study also includes the stock market linkages between Malaysia and the developed markets (the US and the UK) for a more meaningful argument with regard to the importance of market linkages among Malaysia, India and China. Statistical testing includes Johansen multivariate cointegration, Vector Error Correction Model (VECM) to a five-variable model, followed by Granger causality test. The results indicate that there is a long-run relationship among the regional markets. Malaysia and India Granger cause each other, however, this study is unable to detect China s role in the regional market. In fact, in the Asian context, shocks in one country seem to have an effect in other countries for a very short period. Finally, the US market is still the main influential factor in the Asian markets.

Suggested Citation

  • Maran Marimuthu, 2010. "The Co-Movements of the Regional Stock Markets and Some Implications on Risk Diversification," The IUP Journal of Applied Economics, IUP Publications, vol. 0(2), pages 61-80, April.
  • Handle: RePEc:icf:icfjae:v:09:y:2010:i:2:p:61-80
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