On ASEAN capital market and industry integration: A review.

Abstract

Due to the benefits of investment diversification across markets and industries, and the increasing importance of ASEAN capital markets, this paper attempts to review recent studies on capital market integration and investment implications in six selected ASEAN countries. Several methodologies including VAR, GARCH, Copula and DCC, Bayesian approach, CAPM and factor models have been examined in this research. Most of the existing studies consider the capital market integration and its investment implications at a country level, whereas this paper attempts to extend the analysis to the industry level of integration. It also reviews the uses of a VARMA-MGARCH-asymmetric BEKK models to investigate the integration at industry levels in recommending investment diversification. The findings of this paper may provide guidance to academia, investors and policy makers on asset diversification.

Behavior of Global Investors in Five ASEAN Stock Markets in the Industry Level

“…As seen in Table 2, all the standard deviations for each type of correlation EW-LOC, VW-LOC, EW-USD, and VW-USD have values below the mean related to the 10 GICS industry sectors. These results confirm the argumentation that diversification between industries in ASEAN is more effective than diversification between countries and supports the study of Ratner and Leal [2], Richard [3], Hwang and Sitorus [4], and Do et al [5] that for the 2006-2009 period, the correlation between the index returns of each ASEAN country and MSCI's high returns will lead to the more important industry effects than the country effect for global investors. But what's interesting in Table 2 is the higher unconditional correlation of some sectors such as basic materials, financial institution, and property and real estate.…”

“…Based on Table 1, it can be stated generally that unconditional correlations in five ASEAN countries between the index returns of each country and MSCI returns are still much lower than the correlation returns between index pairs of each ASEAN country which confirm the potential gap of diversification benefits internationally in ASEAN that can be utilized by global investors. Based on the opinions of Piumsombun [21], Hwang and Sitorus [4], and Do et al [5], the ASEAN countries which have smaller values of standard deviations than that of the mean for each unconditional correlation will have the potential benefits of international diversification. If you see Table 1, the ASEAN countries are Singapore (LOC and USD), Indonesia (USD), and Thailand (LOC).…”

“…The comparison between standard deviations and the mean of each pair of correlations is actually identical to the Sharpe ratio formula used to measure portfolio performance [see Chen et al [6]]. One form of practical implication is the comparison between mean and standard deviation which refers to Sharpe ratio as the benchmark for benefits of international diversification [see Piumsombun [21], Hwang and Sitorus [4], and Do et al [5]].…”

“…Referring to Table 2, the practical implication is that global investors can choose the basic material industry (code 15) and industrial goods (code 20) because both have very low standard deviation values among other industries. The basis of this selection method refers to study from Hwang and Sitorus [4] and Do et al [5], Nguyen [13], and Vo et al [12]. Table 3 shows the results of the F-test to prove whether there are differences in the level of integration at the country level in ASEAN, which at the same time prove the presence or absence of differences in the benefits of international diversification between countries.…”

“…Several other researchers stated that industrial factors are more non-systematic than state factors. Since the classic study of Roll [1] states that industrial factors have an important role in the effectiveness of international diversification, many researchers such as Ratner and Leal [2], Richard [3], Hwang and Sitorus [4], Do et al [5], and Chen et al [6] began to use industry data such as Global Industry Classification Standard (GICS). According to Menchero and Morozov [7] GICS has been more globalized than other industry standards since it was handled by Morgan Stanley Capital International (MSCI).…”