Issue

Vol 37 No 2 (2022): May

Date Log

Submitted
Mar 19, 2021
Accepted
Apr 6, 2022
Published
May 24, 2022
Creative Commons License

This work is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

Copyright

Upon acceptance of an article, authors transfer copyright to the JIEB as part of a journal publishing agreement, but authors still have the right to share their article for personal use, internal institutional use, and for any use permitted under the CC BY-SA license

Open Access

Articles are freely available to the public without any subscription with permitted reuse. For open access articles, permitted third party (re)use is defined by the following Creative Commons user licenses: Creative Commons Attribution (CC BY-SA).

The Relationship between Asia Pacific Markets during the Financial Crisis: VAR-Granger Causality Analysis

https://doi.org/10.22146/jieb.v37i2.1474
Hayun Kusumah
hayun.kusumah@mail.ugm.ac.id
Marwan Asri
Faculty of Economics and Business, Universitas Gadjah Mada, Yogyakarta, Indonesia
Kusdhianto Setiawan
Faculty of Economics and Business, Universitas Gadjah Mada, Yogyakarta, Indonesia
Bowo Setiyono
Faculty of Economics and Business, Universitas Gadjah Mada, Yogyakarta, Indonesia

Corresponding Author(s) : Hayun Kusumah

hayun.kusumah@mail.ugm.ac.id

Journal of Indonesian Economy and Business, Vol 37 No 2 (2022): May

Abstract

Introduction/Main Objectives: This study investigates the relationships between equity markets during the Asian financial crisis and the subprime mortgage crisis in Asia-Pacific. Background Problems: The advantages of market integration are under scrutiny in the midst of global financial crises, which have many implications for international asset pricing and regulators to develop strategies to protect economies. During the crises, the equity markets responded with different patterns, and it is important to understand in more detail the market relations during each crisis, especially for the less and more integrated markets. Novelty: We provide in-depth analysis to compare the market relationships during two extremely different financial crises originating from less integrated markets (i.e., emerging ones) and more integrated markets (i.e., developed ones), based on the prices which give a direct measurement and clear interpretation. This research provides a significant contribution by showing new findings in the form of a comparison of market relations during two extremely different crises in the Asia-Pacific region. Research Methods: This study employs time-series data from economic territories based on the Morgan Stanley Capital International (MSCI) Asia-Pacific classification and the United States. We conducted analysis using the vector autoregressive, Granger causality test, and impulse response, to point out the market relationships during the crises or turmoil periods. Finding/Results: The results show that the Asian financial crisis affected the emerging markets more and this indicates the unidirectional causality relationships among them. Meanwhile, the subprime mortgage crisis affected all the markets, but more indicated the bidirectional relationships, especially the developed markets. Conclusion: Although these two financial crises were global in nature, the effects on the region were different. The origin of the shock and the level of market integration affected the market relationships differently during the crises.

Keywords

global financial crisis market integration vector autoregression
Kusumah, H., Asri, M., Setiawan, K., & Setiyono, B. (2022). The Relationship between Asia Pacific Markets during the Financial Crisis: VAR-Granger Causality Analysis. Journal of Indonesian Economy and Business, 37(2), 162-187. https://doi.org/10.22146/jieb.v37i2.1474
Download Citation
Endnote/Zotero/Mendeley (RIS)
BibTeX
References
  1. Ahmad, R., Rhee, S. G., & Wong, Y. M. (2012). Foreign exchange market efficiency under recent crises: Asia-Pacific focus. Journal of International Money and Finance, 31(6), 1574–1592. https://doi.org/10.1016/j.jimonfin.2012.02.016
  2. Akbari, A., Ng, L., & Solnik, B. (2020). Emerging Markets Are Catching Up: Economic or Financial Integration? Journal of Financial and Quantitative Analysis, 55(7), 2270–2303. https://doi.org/10.1017/S0022109019000681
  3. Anggun Andini, S., & Falianty, T. A. (2022). Property Price, Capital Inflows, and Financial System Stability in ASEAN-5 Economies: A Simultaneous Analysis. Journal of Indonesian Economy and Business, 37(1), 15–38. https://doi.org/10.22146/jieb.v37i1.1406
  4. Arouri, M. E. H., Nguyen, D. K., & Pukthuanthong, K. (2012). An international CAPM for partially integrated markets: Theory and empirical evidence. Journal of Banking & Finance, 36(9), 2473–2493. https://doi.org/10.1016/j.jbankfin.2012.05.004
  5. Arouri, M., Teulon, F., & Rault, C. (2013). Equity risk premium and regional integration. International Review of Financial Analysis, 28, 79–85. https://doi.org/10.1016/j.irfa.2013.02.009
  6. Baek, I.-M., & Jun, J. (2011). Testing contagion of the 1997–98 crisis in Asian stock markets with structural breaks and incubation periods. Journal of Asian Economics, 22(5), 356–368. https://doi.org/10.1016/j.asieco.2011.05.005
  7. Bekaert, G., Ehrmann, M., Fratzscher, M., & Mehl, A. (2014). The Global Crisis and Equity Market Contagion: The Global Crisis and Equity Market Contagion. The Journal of Finance, 69(6), 2597–2649. https://doi.org/10.1111/jofi.12203
  8. Bekaert, G., & Harvey, C. R. (1995). Time-Varying World Market Integration. The Journal of Finance, 50(2), 403. https://doi.org/10.2307/2329414
  9. Bekaert, G., & Harvey, C. R. (2003). Emerging markets finance. Journal of Empirical Finance, 53.
  10. Bekaert, G., Harvey, C. R., & Ng, A. (2005). Market Integration and Contagion. The Journal of Business, 78(1), 39–69. https://doi.org/10.1086/426519
  11. Berger, D., & Pukthuanthong, K. (2012). Market fragility and international market crashes. Journal of Financial Economics, 105(3), 565–580. https://doi.org/10.1016/j.jfineco.2012.03.009
  12. Candelon, B., & Tokpavi, S. (2016). A Nonpa¬rametric Test for Granger Causality in Distribution With Application to Financial Contagion. Journal of Business & Economic Statistics, 34(2), 240–253. https://doi.org/10.1080/07350015.2015.1026774
  13. Carrieri, F., Errunza, V., & Hogan, K. (2007). Characterizing World Market Integration through Time. The Journal of Financial and Quantitative Analysis, 42, 915–940.
  14. Chua, C. L., Suardi, S., & Tsiaplias, S. (2012). An impulse-response function for a VAR with multivariate GARCH-in-Mean that incorporates direct and indirect transmission of shocks. Economics Letters, 117(2), 452–454. https://doi.org/10.1016/j.econlet.2012.06.031
  15. Claessens, S., Kose, M. A., & Terrones, M. E. (2011). Financial Cycles: What? How? When? NBER International Seminar on Macroeconomics, 7(1), 303–344. https://doi.org/10.1086/658308
  16. Forbes, K., & Rigobon, R. (2001). Measuring Contagion: Conceptual and Empirical Issues. In S. Claessens & K. J. Forbes (Eds.), International Financial Contagion (pp. 43–66). Springer US. https://doi.org/10.1007/978-1-4757-3314-3_3
  17. Goetzmann, W. N., Li, L., & Rouwenhorst, K. G. (2005). Long‐Term Global Market Correlations. The Journal of Business, 78(1), 1–38. https://doi.org/10.1086/426518
  18. Granger, C. W. J. (1969). Investigating Causal Relations by Econometric Models and Cross-Spectral Methods. Econometrica, 37, 424–438.
  19. Hubbansyah, A. K., & Husodo, Z. A. (2018). The Interdependence Between The Finan-cial Sector and Business Sector in ASEAN-4 Countries. Journal of Indonesian Economy and Business, 33(1), 77. https://doi.org/10.22146/jieb.28659
  20. Johansen, S. (1991). Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models. Econometrica, 59, 1551–1580.
  21. Johansen, S. (1995). Likelihood-based Inference in Cointegrated Vector Autoregressive Models. Oxford University Press.
  22. Kose, M. A., Prasad, E. S., & Terrones, M. E. (2009). Does financial globalization promote risk sharing? Journal of Develop-ment Economics, 89(2), 258–270. https://doi.org/10.1016/j.jdeveco.2008.09.001
  23. Lehkonen, H. (2015). Stock Market Integration and the Global Financial Crisis. Review of Finance, 19(5), 2039–2094. https://doi.org/10.1093/rof/rfu039
  24. Lintner, J. (1965). The Valuation of Risk Assets and the Selection of Risky Investments in Stock Portfolios and Capital Budgets. The Review of Economics and Statistics, 47(1), 13. https://doi.org/10.2307/1924119
  25. Markowitz, H. (1952). Portfolio Selection. The Journal of Finance, 7(1), 77. https://doi.org/10.2307/2975974
  26. Mossin, J. (1966). Equilibrium in a Capital Asset Market. Econometrica, 34(4), 768. https://doi.org/10.2307/1910098
  27. Paas, T., & Kuusk, A. (2012). Contagion of financial crises: What does the empirical evidence show? Baltic Journal of Manage-ment, 7(1), 25–48. https://doi.org/10.1108/17465261211195883
  28. Paramati, S. R., Roca, E., & Gupta, R. (2016). Economic integration and stock market dynamic linkages: Evidence in the context of Australia and Asia. Applied Economics, 48(44), 4210–4226. https://doi.org/10.1080/00036846.2016.1153794
  29. Pukthuanthong, K., & Roll, R. (2009). Global market integration: An alternative measure and its application☆. Journal of Financial Economics, 94(2), 214–232. https://doi.org/10.1016/j.jfineco.2008.12.004
  30. Rigobón, R. (2019). Contagion, Spillover, and Interdependence. Economía, 19(2), 69–99. https://doi.org/10.1353/eco.2019.0002
  31. Rossi, B., & Wang, Y. (2019). Vector autoregressive-based Granger causality test in the presence of instabilities. The Stata Journal: Promoting Communications on Statistics and Stata, 19(4), 883–899. https://doi.org/10.1177/1536867X19893631
  32. Setiawan, K. (2012). International Asset Pricing Under Partially Integrated Market [Dissertation]. Hiroshima University of Economics.
  33. Sharpe, W. F. (1964). Capital Asset Prices: A Theory of Market Equilibrium under Conditions of Risk. The Journal of Finance, 19(3), 425. https://doi.org/10.2307/2977928
  34. Shu, C., He, D., Dong, J., & Wang, H. (2018). Regional pull vs global push factors: China and US influence on Asian financial markets. Journal of International Money and Finance, 87, 112–132. https://doi.org/10.1016/j.jimonfin.2018.04.004
  35. Sims, C. (1980). Macroeconomics and Reality. Econometrica, 48, 1–48.
  36. Singh, A., & Singh, M. (2017). A revisit to stock market contagion and portfolio hedging strategies: BRIC equity markets and financial crisis. International Journal of Law and Management, 59(5), 618–635. https://doi.org/10.1108/IJLMA-03-2016-0026
  37. Stulz, RenéM. (1981). A model of international asset pricing. Journal of Financial Economics, 9(4), 383–406. https://doi.org/10.1016/0304-405X(81)90005-2
  38. Volosovych, V. (2011). Measuring financial market integration over the long run: Is there a U-shape? Journal of International Money and Finance, 30(7), 1535–1561. https://doi.org/10.1016/j.jimonfin.2011.07.011
  39. Wan, J.-T., Lau, E., & Brahmana, R. K. (2016). Contagious Effect of Oil Prices on Asian Stock Markets’ Behaviour. Journal of Indonesian Economy and Business, 31(1), 141. https://doi.org/10.22146/jieb.15275
  40. Wang, X. (2015). An Empirical Analysis of Lead-Lag Relationship among Various Financial Markets. Accounting and Finance Research, 4(2), p60. https://doi.org/10.5430/afr.v4n2p60
  41. Wang, Y., & Liu, L. (2016). Spillover effect in Asian financial markets: A VAR-structural GARCH analysis. China Finance Review International, 6(2), 150–176. https://doi.org/10.1108/CFRI-11-2014-0095
Read More
Author biographies is not available.
Download this PDF file
PDF
Statistic
Read Counter : 804 Download : 909