Stock Market Integration and International Portfolio Diversification between U.S. and ASEAN Equity Markets

Rifqi Ardliansyah

MPRA Paper from University Library of Munich, Germany

Abstract: The paper empirically analyzes stock market integration and the benefit possibilities of international portfolio diversification across the Southeast Asia (ASEAN) and U.S. equity markets. It employs daily sample of 6 ASEAN equity market indices and S&P 500 index as a proxy of U.S. market index from years 2001 to 2010. The paper examines the stock market return interdependence from three different perspectives which are ‘long-term’, ‘short-term’ and ‘dynamic’ perspectives. In order to investigate the long-run interdependencies, the Johansen-Juselius multivariate co-integration test and the bivariate Engle-Granger 2-step method were used. In respect to the short-run interdependencies, the Generalized Impulse Response Function (GIRF) and the Generalized Forecast Error Variance Decomposition (GFEVD) are employed. Finally, to assess the dynamic structure of equity market co-movements, the Dynamic Conditional Correlation (DCC) model is engaged. Results suggest that in the long-run, there are no potential benefits in diversifying investment portfolios across the ASEAN and U.S. market since there are evidences of cointegration among them. However, the potential benefits of international portfolio diversification can be seen throughout the short-run-period. Subsequently, the DCC findings suggest an overall proposition that by the end of 2010, most of the ASEAN markets do not share the U.S. stock price movement.

Keywords: Market Cointegration; International Portfolio Diversification; U.S.; ASEAN; ‘long-term’; ‘short-term’ and ‘dynamic’ perspectives; Johansen-Juselius Cointegration; Bivariate Engle-Granger method; GIRF; GFEVD and DCC (search for similar items in EconPapers)
JEL-codes: C01 C32 C35 C51 C61 C87 F36 G11 G14 G15 N20 (search for similar items in EconPapers)
Date: 2012-08-28
New Economics Papers: this item is included in nep-fmk and nep-sea
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