Strategic Study on the Linkages of Asian and the US Stock Markets and their Relative Impacts

Abstract

In the current unpredictable and volatile economic environment, the investment avenues have been changing rapidly. The stock market is one of them. There are multiple unpredictable factors which affect the performance of the global market time to time. In recent years we have observed an unprecedented growth in the complexity of instruments for trading and risk management in international market and thus issues of international stock market linkages and the relationship between the Asian stock markets and others stock markets deserves to be investigated to justify the risk and return factor after the Asian Financial Crisis. This is the first exhaustive study of its kind on linkages and the interrelationship between the Asian stock markets and others stock markets namely, Malaysia (Kuala), Singapore (Strait), Philippines (Pse), Indonesia (Jakarta), China (Shanghai), Japan (Nikkie), Korea (Kospi), and the US (Dow) and reveal that stock markets of Thailand, Japan and China are exogenous before, during and after the crisis respectively. For the purpose of study composite sample consisting of all the stocks based on weekly stock indexes is been used to construct panels and for the same the total samples are separated into three sub periods January 2005 to December 2007, January 2008 to December 2008, January 2009 to December 2009. The first part of paper gives an insight about the Asian and US stock markets and its various aspects. The second part consists of data and their analysis, collected from the various websites and manuals. The short-term linkage was tested through granger causality test based on Vector Error Correction Model (VECM), and the co integration or long- term linkage was through Engle-Granger co integration test. The empirical results show that the number of significant cointegrating vector is higher during the crisis periods compared to other periods and concludes that the linkages between the Asian and the US stock markets are stronger in the post-crisis period Keywords: VECM, Unit Root, DF test, ADF test, P.P Test, Co integration Test, Kuala, Kospi, Pse, Jakarta, Shanghai, Nikkie, Kospi, Dow, Stock market, Panel

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