The co-movement relationship between major developed and Asian emerging stock markets

Abstract

Investors are becoming increasingly interested in international diversification due to the emergence of new capital markets and liberalization of stock markets in recent years. This allows them to have a large basket of foreign securities to make choices for their portfolios of assets to increase profits. However, if the international stock markets move together, investors cannot get the full benefits of diversification. Therefore, this paper studies the co-movement relationship between major developed countries’ stock markets and stock markets in some Asian emerging markets. In this paper, we use the concept of co-integration and find that there is a co-movement relationship between the developed countries (the US, the UK and Japan) and some emerging markets, but we observe that some emerging markets are different from the developed markets with which they have a common long-run equilibrium relationship. Furthermore, the study also finds that after the 1997 Asian Financial Crisis, the interdependence between most of the developed and emerging markets increased that led to the limitation of the benefits of international diversification.