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Malaysian stock market and international integration

Kan, Y. Y. and Lim, G. C. (2013) Malaysian stock market and international integration. Southern UC Academic Journal, 1. pp. 125-166. ISSN 1823-5522

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This paper evaluates the transmission of financial crises to Malaysia by analyzing the stock market integration of United States, United Kingdom, Japan, Singapore, Thailand, Indonesia, Korea, China, and Hong Kong for the period 1990-2011. We explore empirically the effect of crisis on the integration and co-movement and whether the cross-market linkages between these markets change due to crisis. We employ correlation analysis, cointegration test, Granger causality and variance decomposition analysis in our methodology. The sample period is divided into eight sub-periods to correspond with major bull and bear market conditions such as the Asian Financial Crisis1998 and Global Financial Crisis 2008. We find that Malaysian stock market is integrated with major global markets (US, UK and Japan) and major regional markets in Asia (Singapore, Thailand, Indonesia, Hong Kong, Korea) in the long-run. The Shanghai Composite Index of China is integrated of different order and does not share a common long-run relationship with the rest of our sample markets. The Granger Causality Test reveals that HSI, JCI, Kospi, SET, STI Granger-cause Malaysia stock market, which indicates a higher regional causality. Our findings suggest that geographic distance is an important factors contributing to a greater influence on Malaysia. During the period 1991-1997, there is little evidence of cointegration between the Asian, US and UK markets. Our results also indicate that causality is affected by financial crisis. Between years 2001-2007, the increase in the degree of exogeneity of Malaysia could have been due to the imposition of capital controls that have led to a reduction of the effect of foreign influences. No cointegrating relationship is found before and during the global financial crisis of 2008.

Item Type:Article
Divisions:Henley Business School > ICMA Centre
University of Reading Malaysia
ID Code:71249
Publisher:Southern University College

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