حرکت مشترک بازارهای سهام در شرق آسیا: آیا بحران مالی 1997-1998 آسیا، واقعا یکپارچگی بازار سهام را تقویت کرد؟

This paper examines the integration and causality of interdependencies among seven major East Asian stock exchanges before, during, and after the 1997–1998 Asian financial crisis. For this purpose, we use daily stock market data from July 1, 1992 to June 30, 2003 in local currency as well as US dollar terms. The data reveal that the relationships among East Asian stock markets are time varying. While stock market interactions are limited before the Asian financial crisis, we find that Hong Kong and Singapore respond significantly to shocks in most other East Asian markets, including Shanghai and Shenzhen, during this crisis. After the crisis, shocks in Hong Kong and Singapore largely affect other East Asian stock markets, except for those in Mainland China. Finally, considering the role of the USA shows that it strongly influences stock returns in East Asia – except for Mainland China – in all periods, while the reverse does not hold true.

Numerous studies have investigated the transmission mechanisms of stock price movements across international equity markets and how these mechanisms may change over time. This is indeed a non-trivial research question, as shifts in the covariance structure of cross-country stock returns affect the return volatility of investment portfolios, asset prices, and hence also the cost of capital for individual firms (see, for example, Stulz, 1995 and Karolyi and Stulz, 1996, among others). For developed countries, the literature has pointed out a high degree of stock market integration (e.g., Friedman and Shachmurove, 1997, Westermann, 2004 and Quan and Huyghebaert, 2006). Yet, stock markets in emerging countries tend to be less globally integrated. Korajczyk (1996) notes that economic growth, financial market development, and explicit capital controls all affect the degree of stock market integration. This scholar also shows that stock market segmentation has declined over time. However, not all research points in this same direction. Bekaert and Harvey (1995), for example, estimate the extent of stock market integration for 21 developed and 12 emerging-market economies during 1969–1992. They conclude that although some emerging markets did become more integrated over time, others – for instance Chile and India – have become less so.1 In this paper, we wish to examine the degree of stock market integration in East Asia, considering seven major exchanges from developed as well as emerging countries (Shanghai, Shenzhen, Hong Kong, Taiwan, Singapore, South Korea, and Japan). We additionally include the USA in the analyses to examine its linkages with East Asian stock markets. For one thing, empirical studies on the co-integration of stock markets in Asia up till now have yielded mixed results (e.g., Chung and Liu, 1994, DeFusco et al., 1996, Masih and Masih, 1999, Ghosh et al., 1999 and Yang et al., 2003). Besides, we want to find out the direction (causality) of stock market interdependencies and determine whether the enhanced importance of China in the region and in the world has affected the co-movement of stock markets in East Asia. Indeed, China has received scant attention in prior research on Asian stock market integration. One exception is Huang, Yang, and Hu (2000), who examine the bivariate co-integrating relationships and causality among the stock markets of the South China Growth Triangle (i.e. Shanghai, Shenzhen, Hong Kong, and Taiwan), Japan, and the USA using daily data in local currencies from October 1992 to June 1997. Huang et al. document a strong interaction – without co-integration – between Shanghai and Shenzhen. Also, these exchanges hardly interact with the other markets in their sample. Hsiao, Hsiao, and Yamashita (2003) confirm China's isolation in a multivariate Vector Auto-Regressive (VAR) model using daily local-currency data from Shanghai, Taiwan, South Korea, Japan, and the USA from September 2001 to December 2002. Bahang and Shin (2003) reach similar conclusions from examining Shanghai, South Korea, Japan, and the NYSE composite index during 1991–2000.2 Although Bahang and Shin analyze a longer period, they do not explore the possibility of changes in China's integration with other stock markets over time. Nonetheless, following Korajczyk (1996), China's stock market integration within Asia and even the world may have been affected, given its huge economic growth, its enhanced economic interactions with the world through FDI and imports/exports, and the fast development of its stock markets since the beginning of the 1990s.3 So, in this paper we intend to re-examine the co-movement of stock markets in East Asia during a relatively long window, from July 1, 1992 to June 30, 2003, thereby considering potential changes in stock market interdependencies over time. In this study, we pay special attention to the effects of the 1997–1998 Asian financial crisis. The reason is that major economic events can influence the relationships among stock markets. Granger and Morgenstern (1970), for example, argue that existing linkages tend to intensify in the case of a crisis, due to a market contagion effect. 4 However, it is not entirely clear whether crises have a long-lasting effect on stock market interdependencies. Chan, Gup, and Pan (1997) conclude that the 1987 stock market crash did not promote any enduring integration among the 18 countries in their sample. In contrast, Tan & Tse, 2002 and Yang et al., 2003, who also focus on the 1997–1998 Asian financial crisis, conclude that both long-run equilibrium relationships and short-term causal linkages among Asian stock markets were strengthened in a lasting manner following this crisis. We therefore will re-examine carefully the effects of the Asian financial crisis on the co-movement of stock markets in East Asia. Interestingly, China, longing for a larger role in the region and in the world, has played an important role in curbing this crisis. First, China did not devalue its currency, which alleviated the burden for its Asian neighbors that were devaluing theirs, by allowing these countries to improve their competitive position in terms of FDI inflows and exports. Second, China strongly advocated substantial funding packages at low conditions for the afflicted Asian economies. China's sense of solidarity with its neighbors was further demonstrated by its willingness to contribute to these support packages. To investigate the above research questions, we cautiously develop our research design. Indeed, mixed results in prior studies on East Asian stock market integration could be due in part to different research methodologies, sampling frequencies, and sample periods. So, we try to deal with these issues by examining the co-movement of stock markets in a multivariate VAR framework instead of studying their bivariate relationships. Thereby, we meticulously account for the structural breaks that the Asian financial crisis may have engendered. Also, as the lag length is a crucial parameter in these models and the tests that are based upon it, we use Sims' likelihood-ratio test to correctly specify our various VAR models. We implement co-integration tests to examine the long-run equilibrium relationships – if any – among the stock markets in our sample. To figure out their short-term causal linkages, we employ generalized rather than traditional orthogonalized impulse response analysis. We collect daily data in both local currency and US dollar terms to conduct these analyses. Finally, we examine a longer time period, from July 1, 1992 to June 30, 2003, thereby covering five years before and five years after the 1997–1998 Asian financial crisis. We thus should be able to identify a possible time-variant integration among East Asian stock markets, and its relation with the Asian financial crisis. Overall, the data reveal that stock markets in East Asia in general do not exhibit joint underlying forces that drive their long-run swings and thus bear no long-run equilibrium relationship. Only during the Asian financial crisis do we find evidence of a co-integrating vector. Besides, during this crisis a one unit shock in one market sometimes leads to a response that spans several days in another market, suggesting that East Asian stock markets are not highly efficient in that window. In contrast, we find that responses generally arise on the same day before as well as after the Asian financial crisis. When it takes two days to react, this can be attributed to differences in time zone and – for stock markets in the same time zone – to differences in the opening hours of the exchanges. Our analyses further point out that the relationships among East Asian stock markets are time varying. Before the 1997–1998 Asian financial crisis, stock markets in East Asia are largely segmented. The strongest interaction occurs between the exchanges of Shanghai and Shenzhen. Yet, stock markets in Hong Kong, Taiwan, Singapore, and Japan all respond significantly to shocks in the USA. The Asian financial crisis considerably strengthens East Asian stock market integration, albeit in an impermanent manner. Indeed, our results suggest a strong but transient market contagion effect during this crisis, showing that the exchanges of Hong Kong and Singapore are Granger caused by most other East Asian markets, including Shanghai and Shenzhen. Simultaneously, Hong Kong and Singapore Granger cause US stock market returns, demonstrating their important role in the worldwide spreading of the crisis. We also find a marginally significant leading effect of Japan vis-à-vis the USA. Conversely, most East Asian stock markets, except for those in Mainland China, are Granger caused by the US market during the crisis. After the Asian financial crisis, shocks in Hong Kong and Singapore have a substantial bearing on other East Asian stock markets, except for those in Mainland China. Likewise, innovations in the USA considerably affect stock market returns in East Asia, except in Shanghai and Shenzhen. So, our findings reveal that stock markets in Mainland China remain isolated from those in East Asia and the world, despite the country's huge economic and financial development. Also, our results do not support the notion that Japan is a leading stock market in East Asia. However, we do detect that the influence of Japan has increased somewhat in more recent years. Lastly, while US stock prices now react stronger than ever to shocks in East Asia, the impulse response analysis also reveals that the magnitude of these responses is still limited. The remainder of this paper is organized as follows. Section 2 briefly reviews previous studies on Asian stock market integration, from which we draw inferences for our own research design. Section 3 describes the data, while the empirical results from our various multivariate VAR models are reported and discussed in Section 4. Finally, Section 5 concludes this paper.

This paper examines the long-run and short-term causal relationships among seven major stock exchanges in East Asia, while also considering their interactions with the USA. We build multivariate VAR models to examine the degree of integration among these stock markets. Thereby, we pay special attention to the effects that the 1997–1998 Asian financial crisis has engendered. We first run co-integration tests to figure out whether a long-run equilibrium relationship(s) exists among the sample markets before, during, and after this crisis. Thereafter, we implement Granger causality tests to examine their time-varying lead–lag relationships. Finally, we conduct generalized impulse response analyses to decide on the short-term causal relationships in the different subperiods. The above analyses all use daily data in local currencies as well as in US dollars, revealing that the denominating currency is only of minor importance. We find that before the 1997–1998 Asian financial crisis, stock markets in East Asia – except for Shanghai and Shenzhen – generally respond to worldwide shocks; regional innovations indeed have only a limited effect on stock prices. Yet, the Asian financial crisis has strengthened the linkages among stock markets in East Asia, except for those in Mainland China. However, this outcome turns out to be only a temporary phenomenon, thereby pointing out that the increased interdependencies during the crisis likely result from a market contagion effect. Also, East Asian stock markets do not always react in a very efficient manner to shocks during this period, as a one unit shock in one market sometimes leads to a response that spans several days in another market. Our results further demonstrate that the Hong Kong and Singaporean stock markets play an important role in spreading the crisis in East Asia and in the world. In more recent years, stock market integration has strengthened again. Yet, unlike Yang et al. (2003), our results do not support the idea that stock markets are co-integrated as of the 1997–1998 Asian financial crisis. Also, China's stock market isolation remains, despite its huge economic growth and financial market development. The influence of the Hong Kong stock market – which was substantial during the crisis – has declined somewhat over time, while interdependencies among other East Asian stock markets have become more eminent. More recently, the Singaporean stock market has become at least as important as that in Hong Kong. While the influence of Japan has increased over time, our results do not support a leading role for Japan in the region. Shocks in Hong Kong, Singapore, and Japan do have a significant effect on share prices in Taiwan and especially South Korea, whereas the latter markets still hardly affect the other East Asian stock markets in our sample. Besides, US stock market returns help to explain returns in East Asia – except in Mainland China – and vice versa. We do have to point out that the latter relation, although increased over time, is still relatively small in magnitude. Arguably, our results stress an enhanced integration of capital markets in East Asia, with each other and with the USA, which is in line with the stronger macro-economic linkages among countries worldwide.