Financial Liberalization and Stock Markets Integration for Asean-5 Countries

Abstract

This paper examines the relationship of financial liberalization and stock markets integration among ASEAN-5 (Note 1) stock markets: Indonesia, Malaysia, the Philippines, Singapore and Thailand. Three sample periods are covered based on the progress of financial liberalization. By using Johansen and Juselius multivariate cointegration procedures, Granger-causality tests and variances decomposition analysis, the results indicate no long-run relationship during Singapore stock market liberalization in the first period. However, long-run relationship established between ASEAN-5 stock markets in the second period when Thailand, Malaysia and Indonesia have liberalized their stock markets and the third period following the Philippines liberalization. The long run integration relationships and the short-run causality relationships among ASEAN-5 markets have both increased after the financial liberalization. Thailand, Malaysia, Indonesia and the Philippines markets have received increased influences from other stock markets in the progress of financial liberalization whereas Singapore remains unaffected by the others. Stock markets that liberalize earlier will have greater influence on other stock markets.

Access to Finance

“…The result showed evidence that the financial liberalisation dummy is positive and statistically significant in all the three models representing each market. This is in accordance with most empirical studies, such as Bekaert et al, [4], Huang [45] and Puan et al, [12]. This also supports the argument that the effect of financial liberalization is most effective in the short run.…”

“…Puan et al, [19] studied the relationship between the financial liberalisation and stock market integration of the five Association of South-East Asian Nations (ASEAN) economies. The study provided evidence of increased integration in the post-liberalisation period.…”

“…To analyse the impact of financial liberalisation on the integration of stock markets, previous studies, such as Bekaert et al, [4], Phylaktis et al, [11], Ibrahim [7] and Puan et al, [12] dissected the data into pre-and post-liberation period. The contribution of this paper is by using a financial liberalisation dummy to capture the impact of financial liberalisation on the integration of markets.…”

Dynamics of Stock Markets Interdependence in the Pre-and Post Global Financial Crisis Period: Evidence from Toda-Yamamoto Causality Test

“…This is further explained by [3,4] and [5] who had argued that interdependence between stock exchange markets is dynamic and changes according to the state of the markets, that is pre-crisis period is marked by financial fragility with stock markets giving high return attracting investment from other markets, while periods of crisis and post-crisis are marked with high correlation and fewer diversification benefits. This is supported by literature such as [6,7] and [8] among others.…”

“…In a separate study, [19] employed the Granger causality and spatial probit models and concluded that causal relationship between stock markets is influenced by proximity, time and return spillover. [8] test the causality of the 5-ASEAN stock markets and concluded that liberalization of the markets influenced the causal relationship between international stock markets. [20] argued that dynamic relationship of financial time series exhibits non-linearity, which they termed as the nonlinear causal relationship.…”