Academic journal article Review of European Studies

Global Financial Crisis and Stock Market Integration between Northeast Asia and Europe

Academic journal article Review of European Studies

Global Financial Crisis and Stock Market Integration between Northeast Asia and Europe

Article excerpt


This study examines the effect of financial crisis on the level of stock market integration. In particular, we investigated the dynamic movements of two regional stock markets, Northeast Asia and Europe during the period between January 1st, 2000 and December 31st, 2012, with particular attention placed on the global financial crisis (GFC). For this purpose, the paper employs various approaches including DCC-MGARCH, Risk Decomposition, GVAR, and CCOR models to ensure the robustness of empirical findings. The findings of this study are as follows. First, the Northeast Asian stock market remains independent from the European and global stock market movements during the sample period. Second, the European stock market shows an increasing trend of joint integration with Northeast Asian stock market. However, the level of integration is not economically significant. Third, the level of market integration between European and global stock markets had temporally increased during the GFC. However, the level returned to its pre-crisis level in the post-crisis era. The overall empirical evidence suggests that, for either European or global stock market portfolio, constructing a portfolio with Northeast Asian stock market would result in a more efficient portfolio. The results in this paper do not support the view of previous empirical studies which suggested the increased level of integration since the GFC. An increased integration is found to be only unique to the crisis period. In sum, the market integration is a dynamic process, and the financial crisis did not uniformly affect the level of stock market integration.

Keywords: market integration, risk decomposition, dynamic conditional correlation, diversification

(ProQuest: ... denotes formulae omitted.)

1. Introduction

The advancements in information technology, the rise of multi-national corporations, and the relief of traditional trade barriers have increased the economic linkages across countries and have facilitated the creation of regional economic cooperation. It has been suggested that the capital market integration leads to an efficient financial market by increasing the liquidity and reducing the transaction costs. In addition, an integrated stock market may contribute to the market stabilization because it reduces the market volatility by sharing the macroeconomic shocks. Empirical papers investigating the market integration have been mainly limited to individual stock markets in developed countries. (Note 1)

These studies generally point to a higher level of integration among stock markets after macroeconomic shocks such as the recent global financial crisis (GFC) and the 1997 Asian financial crisis. However, the generalization of empirical results needs a caution because they are based on different methodologies, time periods, and countries.

This paper contributes to the existing literature by investigating the dynamic pattern of integration between aggregated stock markets. In particular, we examine the pattern of integration between two regions, Northeast Asia and Europe, by using various dynamic models to ensure the robustness of empirical findings. The advantage of focusing on aggregated regional market is that the specification of the empirical model can be simplified with regional markets. Given the large number of countries in each region, it is almost impossible to construct a model which simultaneously links among all local markets in the region. According to the modern economic trends, the economic linkages are so strongly tied across regions or the economic blocs rather than across the individual markets. From EU's perspective, the integration of individual capital markets leads to a convergence of European economies, and broadens investment opportunities for both investors and corporations. Recently, however, the benefits of capital market integration in this region have been severely affected by the GFC, and the effect is pervasive and tenacious. …

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