Permanent and Transitory Driving Forces in the Asian‐Pacific Stock Markets

Ali F. Darrat · Maosen Zhong

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Financial Risk and Volatility Modeling Financial Markets and Investment Strategies Market Dynamics and Volatility

Abstract

This paper uses weekly data from November 1987 through May 1999 to examine whether U.S. or Japan stock market (or both ) is the main driving force behind major movements in eleven emerging Asian-Pacific stock markets. We find a robust cointegrating relation linking each of the emerging market with the two matured markets of the U.S. and Japan. The results also show that the U.S., rather than Japan, is the main permanent force driving the equilibrium relations across all Asian-Pacific markets. In contrast, the effect of the Japanese market on the Asian-Pacific region is only transitory. Therefore, strategic asset portfolios in the Asian-Pacific region should include Japanese stocks to diversify any country specific risks. As to U.S. investors, the persistent influence of the U.S. market effectively limits long-run diversification gains from Asian-Pacific stocks. diversification

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