The Co-Movements of the Regional Stock Markets and Some Implications on Risk Diversification

As risk diversification is the main concern for most investors, they tend to look into the possibility of broadening their investment activities across the countries or creating a region-based investment policy. This requires the understanding of regional and global linkages of stock markets. Specifically, this study makes an attempt to re-examine the co-movements among the Malaysian, Indian and Chinese equity markets. This study also includes the stock market linkages between Malaysia and the developed markets (the US and the UK) for a more meaningful argument with regard to the importance of market linkages among Malaysia, India and China. Statistical testing includes Johansen multivariate cointegration, Vector Error Correction Model (VECM) to a five-variable model, followed by Granger causality test. The results indicate that there is a long-run relationship among the regional markets. Malaysia and India Granger cause each other, however, this study is unable to detect China’s role in the regional market. In fact, in the Asian context, shocks in one country seem to have an effect in other countries for a very short period. Finally, the US market is still the main influential factor in the Asian markets.