Asian Economic Integration and Stock Market Comovement

Luc A. Soenen · Robert R. Johnson

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Abstract

Using daily returns from 1988 to 1998, we investigate to what degree twelve equity markets in Asia are integrated with Japan's equity market and examine the factors that affect the level of economic integration. We find that the equity markets of Australia, China, Hong Kong, Malaysia, New Zealand and Singapore are highly integrated with the stock market in Japan. There is also evidence for these Asian markets to become more integrated over time, especially since 1994. A higher import share as well as a greater differential in inflation rates, real interest rates and gross domestic product growth rates have negative effects on stock market comovements between country pairs. Conversely, increased export share by Asian economies to Japan and greater foreign direct investment from Japan to other Asian economies contribute to greater comovement.

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References

1986Economic Forces and the Stock Market 1995Time‐Varying World Market Integration 1982Measurement of Linear Dependence and Feedback Between Multiple Time Series 1990Correlations in Price Changes and Volatility across International Stock Markets 1995Is the correlation in international equity returns constant: 1960–1990?1993Financial markets and growth 1989International Transmission of Stock Market Movements 1996Why Do Markets Move Together? An Investigation of U.S.‐Japan Stock Return Comovements

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