Economic integration and stock market dynamic linkages: evidence in the context of Australia and Asia

Sudharshan Reddy Paramati, Eduardo Roca, Rakesh Gupta

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    8 Citations (Scopus)

    Abstract

    Countries are becoming economically integrated and it is contended that this will also lead to their financial markets becoming integrated. This contention is important since international financial market integration diminishes portfolio diversification benefits and creates contagion risk. We test this contention in this article in the context of the Australasian region. Australia and Asia have experienced very significant economic integration through a rapid growth in their bilateral trade. We utilize a battery of econometric techniques – cointegration, asymmetric generalized dynamic conditional correlations and panel regression models. As expected, we find that trade intensity significantly drives the interdependence between their stock markets in both the short run and the long run. Thus, given the ever increasing economic integration in this region, this finding implies that their stock markets face the risk of contagion, and that investors in these markets would also be confronted with the prospect of lower diversification benefits.

    Original languageEnglish
    Pages (from-to)4210-4226
    Number of pages17
    JournalApplied Economics
    Volume48
    Issue number44
    Early online date13 Mar 2016
    DOIs
    Publication statusPublished - 19 Sep 2016

    Keywords

    • AGDCC GARCH
    • Australasian region
    • Economic integration
    • stock market interdependence

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