TITLE:
Exploring the Cointegration Relation among Top Eight Asian Stock Markets
AUTHORS:
Muhammad Rizwanullah, Lizhi Liang, Xiuyuan Yu, Jinan Zhou, Muhammad Nasrullah, Muhammad Uzair Ali
KEYWORDS:
Cointegration, Eigenvalue, Portfolio, Granger Causality
JOURNAL NAME:
Open Journal of Business and Management,
Vol.8 No.3,
April
21,
2020
ABSTRACT: Asian stock market faces many
favorable and unfavorable incidents of collapsing internal market in last
decades. The local investors are interested especially in the countries like
China, Malaysia, UAE and Bangladesh which are politically, geographically and
strategically important as investment portfolio point of view. The investors have experience of moving many markets
together in long run which is a bad news for investors to diversify their
investment in different markets. Therefore, the objectives of the study is to
find the direction and short and long run association among top eight Asian
stock Markets by applying Johansen cointegration test and Granger Causality
Test. The augmented unit root test and Phillips-Peron proved the presence of
unit root in data at level. The cointegration analysis test based on trace
statistics shows five cointegrating equation, while the maximum eigen valve
test indicates two cointegrating equation at 5 percent significant level.
Results imply that these markets are strongly cointegrated in long term which
can diversify local and foreigner investors. The Granger Causality shows that
13 pairs of markets are bidirectional while 12 pairs are unidirectional and 3
pairs have no causality. From the result it is obtained that integrated markets
are useful for decreasing the chances of financial stability and asymmetric
shocks, which can strengthen the capability of the economy to absorb the shocks
and adequate the risk of international financial contagion. It is concluded
that for investor views there are still possibilities for efficient portfolio
diversification across these markets. In addition further study should be
carried out to find the reason of cointegration.