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

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  • Kalai Lamia

Abstract

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.

Suggested Citation

  • Kalai Lamia, 2021. "Financial integration of Asian markets: multivariate cointegration, causality and variance decomposition," International Journal of Business and Systems Research, Inderscience Enterprises Ltd, vol. 15(4), pages 510-526.
    • Handle: RePEc:ids:ijbsre:v:15:y:2021:i:4:p:510-526
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    Cited by:

    1. Burak Erkut & Gagan Deep Sharma, 2023. "Financial integration in Asia: new Empirical evidence using dynamic panel data estimations," International Economics and Economic Policy, Springer, vol. 20(1), pages 213-231, February.

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