This paper applies cointegration and VAR modeling to evaluate the long-run relationship and dynamic interactions between the Malaysian equity market, various economic variables, and major equity markets of the US and Japan. From the analysis, we find evidence for cointegration among the variables. The variance decompositions and impulse-response functions generated from the VAR suggest the dominant influence of nominal variables, particularly the money supply on Malaysian equity prices. At the same time, variations in equity prices do contain some information on such nominal variables, as money supply and consumer prices, suggesting bidirectional causality between them. We also note from the results the significant role of international equity prices on Malaysian equity prices as well as on Malaysian economic variables. Interestingly, the nature of the long-run relationship and spillovers of disturbances in the two major markets to the Malaysian economy is different. From a policy point of view, to the ex...

Macroeconomic forces and capital market integration A VAR analysis for Malaysia

Due to the benefits of investment diversification across markets and industries, and the increasing importance of ASEAN capital markets, this paper attempts to review recent studies on capital market integration and investment implications in six selected ASEAN countries. Several methodologies including VAR, GARCH, Copula and DCC, Bayesian approach, CAPM and factor models have been examined in this research. Most of the existing studies consider the capital market integration and its investment implications at a country level, whereas this paper attempts to extend the analysis to the industry level of integration. It also reviews the uses of a VARMA-MGARCH-asymmetric BEKK models to investigate the integration at industry levels in recommending investment diversification. The findings of this paper may provide guidance to academia, investors and policy makers on asset diversification.

On asean capital market and industry integration: a review

As the economies of the Association of Southeast Asian Nations (ASEAN) have moved towards closer economic ties and trade integration in recent years, the establishment of exchange rate stability is becoming an important regional policy concern, particularly in the wake of the Asian currency crisis of 1997. This paper examines the exchange rate volatility of the currencies of Indonesia, Malaysia, Philippines, Singapore and Thailand between 1974 and 1999. Using variance decomposition (VDC) methods and impulse response functions, which are VAR-related estimation techniques, the study also investigates the regional currency linkages which may have played a role in transmitting exchange rate fluctuations. The results indicate that, in spite of the adoption of the crawling peg exchange regime following the breakup of the Bretton Woods system, all of the five ASEAN currencies experienced volatility, with the Indonesian rupiah posting the highest volatility level. The switch to de facto pegging against the US dol...

Exchange rate volatility and the role of regional currency linkages: the ASEAN case

The paper empirically analyzes financial integration and the benefits of international diversification across US, Japan and ASEAN equity markets. Our results suggest no evidence of cointegration among (1) ASEAN markets, (2) an individual ASEAN market, the US and Japanese markets, and (3) ASEAN markets, the US and Japanese markets. However, results from impulse-response functions indicate immediate responses of each ASEAN market to innovations in other ASEAN markets, as well as to innovations in the US and Japanese markets. Among the ASEAN markets, the Indonesian market seems relatively isolated; the Malaysian market is most influential, followed by the Singapore equity market. The US market is found to be more dominant than the Japanese market. Our results suggest potential benefits of international portfolio diversification across these markets for investors that have long-term investment horizons. However, the short term gains may be limited, especially to investors from the US.

Financial Integration and International Portfolio Diversification: US, Japan and ASEAN Equity Markets

The paper analyzes the relative influences of US, Japanese and domestic disturbances on domestic fluctuations for the case of Malaysia. Utilizing VAR framework and quarterly data from 1978 to 1999, we focus on their influences on aggregate fluctuations as well as on sectoral cycles. Our results suggest that aggregate and sectoral output fluctuations originate principally from domestic sources. However, the importance of the US and Japanese business cycles can not be ignored as they exert quite substantial influences on domestic output variability. Comparatively, the Japanese influences seem to be larger. However, from sectoral perspectives, there are disparities in the responses of sectoral output to US and Japanese disturbances. While some sectors are affected more by disturbances in Japan, other sectors seem to be more vulnerable to the US shocks. From a policy point of view, policy designs that ensure predictable domestic macroeconomic environment are most important and they need to be aligned more to those of Japan for curbing output variability. Which sectors should be given focus, however, depends crucially on the sources of disturbances.

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A var analysis of us and japanese effects on malaysian aggregate and sectoral output

This study investigates existence of any economic linkages among the five founding members of the Association of Southeast Asian Nations (ASEAN), and explores the nature of these linkages. Based on the Vector Autoregression, variance decomposition and impulse response function analyses applied to quarterly real GDP data for the 1975-93 period, the results show the leading role of Indonesia and the significant economic linkages among them. The direction of causation and transmission is from Indonesia to the Philippines to Thailand to Malaysia and to Singapore. A two-way causation is found between Singapore and Malaysia. The study also finds the economic vulnerability of the ASEAN group of countries to changes in U.S. output, and the competitive nature between the Japanese and the ASEAN economies. These findings have important policy implications. 1. Introduction This article examines the issue of economic linkages among the ASEAN group of countries, and assesses the strength and the direction of these linkages.1 Although much has been written about the growing economic interdependence among these countries, so far no study has been undertaken to quantify and explore the nature of their interdependence. To achieve this objective, we utilize vector autoregression (VAR) techniques used to study regional linkages (Cargill and Morus 1988; Cromwell 1992; Sherwood-Call 1988). We examine the regional and international spillover effects on the ASEAN economies. Specifically, we investigate these questions: Which ASEAN country drives the ASEAN region? Do economic shocks in a member country spill over to other member countries? If yes, what is the direction of shocks transmitted among the ASEAN countries? Are these economic shocks external to the ASEAN economies? Understanding how economic shocks are transmitted among the ASEAN countries is important because of policy implications. If ASEAN economies are susceptible to spillovers from each other (which can be positive or negative) and if we can identify the source of transmission, then the effectiveness of one's macroeconomic policy setting will greatly be enhanced. Under this scenario, policy coordination for the mutual benefit of the ASEAN member countries may be called for. In light of growing intra-ASEAN trade and investments under a more liberal economic environment, the ASEAN countries are expected to share common economic linkages so that a recession in one member country may spill over into other member countries in terms of output and employment decline. The 1985 recession and the 1997 currency crisis, for example, which hit all the ASEAN group of countries, could be a reflection of these economic linkages. The questions of which ASEAN country drives the ASEAN region and how the economic shocks are transmitted among different economies are answered by employing vector autoregression (VAR) techniques using quarterly data on real GDP for ASEAN countries, Japan and the United States for the period of 1975 to 1993. The results can be used to identify leading and lagging relationships between variables and, with further identifying restrictions, to measure the economic importance of these dynamic relationships. Variance decomposition method is used to measure the economic importance of these relationships and impulse response functions are used to trace the direction of the effects of a shock in one country on the other countries. The objective is to examine the extent to which economic fluctuations in a country are driven by its own economy, or by linkages to other countries. This article complements other work that study linkages among the ASEAN economies. Ariff (1996) studies the external effects on financial liberalization in four ASEAN members and finds that external effects induces efficiency in the financial systems. Manzur and Ariff (1995), on the other hand, examine the relationship of prices in five ASEAN economies and find that a long-run relationship holds. …

Habib Ahmed

Papers

An Investigation of Economic Linkages among the ASEAN Group of Countries