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

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 to add to their portfolio assets, so as to enhance the reward-to-volatility ratio. This benefit, is however limited, should national equity markets move together in the long run. This paper thus studies the issue of co-movement between stock markets in major developed countries and Asian emerging markets using the concept of cointegration. We find that there is co-movement between some of the developed and emerging markets, but emerging markets do differ in the developed market with which they share a long-run equilibrium relationship. Furthermore, it has been observed that there is increasing interdependence between most of the developed and emerging markets after the 1987 Stock Market Crash. This interdependence is further intensified after the 1997 Asian Financial Crisis. With this phenomenon of increasing co-movement between developed and emerging stock markets, the benefit of international diversification thus becomes limited.