Financial Market Integration of ASEAN-5 with China

Abstract: This study aims to estimate the potential portfolio diversification in the financial markets of Indonesia, Malaysia, Philippines, Singapore and Thailand (ASEAN-5), and of China, in the context of China stock market crash, in 2015. For this purpose, we establish two research questions: i) China stock market crash promoted financial integration between the ASEAN-5 and China markets? ii) if so, does this effect had a positively influence in the occurrence of short-term co-movements between markets? Using stock market data from January 2015 to January 2019, we found that, during the crash, the level of financial integration rose 533%, which supports our first research question. However, during the 2015 stock market crash, most markets decreased the co-movements with their regional peers, which does not corroborate the second assumption. Additionally, analysis to the relationship between the markets, through the impulse response function showed evidence of positive co-movements, with statistical significance and persistence longer than one week. Thus, the ASEAN-5 and China markets may not be efficient in their weak form, since there was no immediate adjustment in prices between markets, due to the high levels of market shocks identified. However, we believe that the implementation of efficient portfolio diversification strategies, based on historical prices, remains beneficial for investors.