Academic journal article Academy of Accounting and Financial Studies Journal

The Effect of Contagion on Stock Market Development in the Asean-5: A Seemingly Unrelated Regression Analysis

Academic journal article Academy of Accounting and Financial Studies Journal

The Effect of Contagion on Stock Market Development in the Asean-5: A Seemingly Unrelated Regression Analysis

Article excerpt


The improvement in the ability of stock market to satisfy the needs of financial players in the traditional sub-sector including the capital markets is the general definition of the Stock Market Development (SMD). This definition also shared by Balogun et al. (2016); Capasso, (2006); Nowbutsing and Odit, (2009); and Sezgin and Atakan, (2015). In the study of SMD, various determinants have been well documented. However, there are least attention have been paid on the effects of contagion on SMD.

In understanding its mechanism from the theoretical perspective, the Thornton's Contagion Theory which was cited in Garcia, (1989); Moser, (2003); and Werner, (2014) is referred. Based on this theory, contagion can be defined as the transmission of crisis from a country to another country or region. However, this theory is primarily focus on the banking sectors. Therefore, the contagion effects explained by Forbes and Rigobon (2002) is considered. According to Forbes and Rigobon, the contagion is occurring if there is a significant increase in the cross market interaction after a crisis period. Otherwise, if there is a high interaction between the market in the pre and post crisis, it will constitute interdependence. Based on the definition, countries that share the same geographical characteristic, structure, history and have a strong direct linkage in term of trade and finance might be closely connected even in a stable period. Therefore, any crisis occurs in any of the country would possibly spread to its counterparts.

In particular, this paper aims to measure the contagion effects on SMD between the United States (US) stock market and the stock market in the Association of South East Asian Nation 5 (ASEAN-5) comprises of Malaysia, Indonesia, Thailand, The Philippines and Singapore. To do so, the inclusion of market interaction terms as specific indicators of interest has been incorporated into estimable SMD models which also could be found in previous studies such as Dornbusch et al. (2000); Claessens and Forbes (2004); and Serwa (2005). For a clearer perspective, the pattern of market index movements for both the ASEAN-5 and the US within the 1990-2014 timeframe is illustrated in Figure 1.

In the beginning, all ASEAN-5 countries posted a relatively similar pattern in their market indexes between 1990 and 2003. Interestingly, in later years, it is worth to highlight from Figure 1 that there is clear evidence on the positively established relationship between the stock market movements for the ASEAN-5 and the US particularly in the 2007-2008 period. Therefore, there is a possibility of market interaction at a certain degree to be prevailed between the stock markets for the ASEAN-5 and the US. Given by this market interaction, any changes in the US stock market could affect the stock market in the ASEAN-5.

Therefore, the price of the stocks in the ASEAN-5 would be reflected by the contagion effect of the US stock market. More or so, traders which possess some information on capital markets would initiate an order to sell their stocks subsequently render to the possibility of yielding price depreciation. The rest of this paper is structured as follows. Next section would discuss on the methodology followed by discussion of results. Then, to wrap up, conclusion and policy implications and/or recommendations are provided in the last section.


This section provides the details regarding data, estimation procedure and estimable models.


This paper investigates the contagion effects of the US on the ASEAN-5's SMD by utilizing data of ASEAN--5's market indexes which are Bursa Malaysia (BM), The Indonesia Stock Exchange (IDX), Stock Exchange of Thailand (SET), The Philippine Stock Exchange (PSE) and The Singapore Exchange (SGX) the year 1990-2014. For the US index, Dow Jones Index is used because it quoted the most highly capitalized and influential companies in the US market (Grimaldi, 2010). …

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