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Increasing Integration Among Asia Pacific Equity Markets

by Brindha Gunasingham

East-West Center Working Papers, International Graduate Student Conference Series, No. 18

Publisher: Honolulu: East-West Center
Publication Date: 2005
Binding: paper
Pages: 26
Free Download: PDF

 


This research examines whether recent stock market crashes have affected the inter-relationships between 12 equity markets in the Asia Pacific, thereby affecting investment decisions across the region. One of the major concepts underlying portfolio management and investment decisions is the reduction of risk by diversifying investments across non-integrated assets.

“The argument often heard in favor of international investment is that it lowers risk without sacrificing expected return. A prerequisite for this argument is that various capital markets of the world have somewhat independent price behaviour.” (Solnik 2000)

Conventional asset allocation decisions are made on the basis of short term integration. However, long term relationships can differ significantly. The impact of these crashes on both short term and long term integration were, therefore, examined.

The instances of significant short term correlation increased over the period, as did long term integration, implying that diversification opportunities across the region fell. However, there were numerous instances when the level of short term and long term integration between specific markets differed. In addition, many specific combinations of markets that may still result in risk diversification were found.