The Dynamics Of Market Integration Level And Its Determinants For Asean-5
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Date
2011-11
Authors
Yeoh, Bit Kun
Journal Title
Journal ISSN
Volume Title
Publisher
Universiti Sains Malaysia
Abstract
Although debates on the stock market integration have emerged from academicians and practitioners, no firm conclusions about its nature and behavior have been fully drawn. While stock market integration gives a few important benefits such as fostering development of financial markets and reducing the cost of financial intermediation, highly integrated market may also eliminate the benefit of portfolio diversification and facilitates contagion effect. Unlike most previous studies that assumed constant level of stock market integration, this thesis employs Kalman filter (KF) technique to investigate the time-varying stock market integration level of ASEAN-5 stock markets with the world market. Furthermore, this thesis also assesses the time-varying influence of determinants that drive the stock market integration level. In this study, the sample covers a 23-year period, from February 1988 to February 2010.
The results show that the KF model is superior than the OLS regression model in terms of goodness-of-fit and measure of forecast error. Although the time-varying standard errors estimated by the KF model are generally larger than those of the OLS regression model, the KF model has produced more reasonable estimates for the level of market integration from financial point of view. While the OLS estimation suggests that the ASEAN-5 stock markets are fully integrated with the world market throughout the sample period, the KF estimation suggests that the stock market integration level is in fact vary over time with the ASEAN-5 stock markets
were segmented from the world market during the 97/98 Asian financial crisis period.
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Keywords
The dynamics of market integration level , its determinants for Asean-5