Asian stock markets, a decade after global recession, coupled or decoupled?

• Published date: 01 December 2022
• Author: Saji T. G.
• Date: 01 December 2022
• DOI: http://doi.org/10.1002/pa.2727

RESEARCH ARTICLE

Asian stock markets, a decade after global recession, coupled

or decoupled?

Saji T. G.

School of Management Studies, Cochin

University of Science and Technology, Kochi,

Kerala, India

Correspondence

Saji T. G., School of Management Studies,

Cochin University of Science and Technology,

Kochi, Kerala, India.

Email: sajthazhungal@gmail.com

Abstract

This paper examines the dynamics of price integration among Asian financial markets

during the postfinancial crisis period. We employ the autoregressive distributed lag

(ARDL) bounds test to analyze the long-run relationships, and the nonlinear ARDL

(NARDL) test to explore asymmetries in the stock price behavior. The cointegration

results could not produce any conclusive evidence of long-run relations between

stock markets. The estimated NARDL model affirms the presence of asymmetries in

the stock price behavior. Namely, in the long run, we find a significant relation among

stock price decreases of some markets while the long-run relations among price

increases are almost absent. Furthermore, in the short run, only negative changes in

the stock price exert significant influences on the price performance of peers. This

study improves the previous research in the area by testing the asymmetric effects

of stock price integration on portfolio optimizations for global investors.

KEYWORDS

ARDL, Asian markets, financial integration, NARDL, portfolio diversifications

1|INTRODUCTION

Over the past two decades, there has been a growing interest in the

topics of financial integration and capital market development in dif-

ferent parts of the world. Financial liberalization and market openness

in step with radical shifts in the structure of financial transactions pro-

mote the financialization of world economies (Agénor, 2003). More-

over, increasing accessibility to global markets with innovations in

information and communication technology (ICT) offers large poten-

tials of optimization choices to portfolio investments (Fauver

et al., 2004). The changing pattern of capital mobility, product innova-

tion, and development in financial infrastructure has augmented the

linkage of many domestic financial markets (Thalassinos et al., 2006).

Methodical arguments claiming capital market integration hover

around the risk diversification potentials, domestic investment and

growth, and enhanced macroeconomic efficiency. Furthermore,

financial liberalization contributes considerably to amplify the speed

of volatility transmissions from global markets as well as the risk of

market failures across countries (Ben Rejeb & Boughrara, 2015). The

countries with close trade and investment relations should have more

closely linked financial markets (Chen & Zhang, 1997).

In theoretical literature, the concept of financial market integra-

tion originates from the efficient market hypothesis. In an efficient

market, the stock price index reflects all available information, includ-

ing information contained in other stock price indices. If equity mar-

kets are financially integrated, the price of risk should be the same

across markets (Ferson & Korajczyk, 1995) and investors earn the

same risk-adjusted expected return on similar financial instrument

(Jorion & Schwatz, 1986). Markets share a long-run equilibrium rela-

tion between prices once they become integrated (Bachman

et al., 1996). A complete integration of capital market thus should

imply the absence of arbitrage opportunities (Akdogan, 1992). Even

though it might not be possible to make abnormal profits through

international portfolio diversification in the long run, it might be still

possible to make abnormal profits in the short run. On the other hand,

once the markets are not financially integrated, the price of risk may

This project is not funded by any agency and the author has the sole right to publish this

paper. Moreover, it is not under the consideration of publication in any book, journal or any

other reports.

Received: 19 August 2020 Revised: 2 June 2021 Accepted: 9 July 2021

DOI: 10.1002/pa.2727

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https://doi.org/10.1002/pa.2727