Stock market integration in ASEAN after the Asian financial crisis

This paper considers the degree to which the five stock markets in the original Association of Southeast Asian Nations countries (ASEAN-5) are correlated as a way to assess the feasibility of policy initiatives to enhance ASEAN stock market integration and the implications for portfolio investors. In particular, this paper considers whether the ASEAN-5 markets are integrated or segmented using the time series technique of cointegration to extract long-run relations. The empirical results suggest that the ASEAN-5 stock markets are cointegrated and are thus not completely segmented by national borders. However, there is only one cointegrating vector, leaving four common trends among the five variables. We therefore conclude that ASEAN-5 stock markets are integrated in the economic sense, but that integration is far from complete. On a policy level, initiatives to further integrate the stock markets are feasible, and in fact desirable. From the perspective of the international portfolio investor, benefits of international portfolio diversification across the five markets are reduced but not eliminated.