Article

Financial Crisis and Stock Market Global Business Review

16(6) 1127–1142
Integration: An Analysis © 2015 IMI
SAGE Publications
of Select Economies sagepub.in/home.nav
DOI: 10.1177/0972150915604519
http://gbr.sagepub.com

Aman Srivastava1
Shikha Bhatia2
Prashant Gupta1

Abstract
The financial integration of global markets has been an important topic of research and the behaviour
of emerging markets is receiving even greater interest after the recent developments in financial
markets across the world. The purpose of this article is to investigate the integration of the developed
market of the US and emerging Asian stock markets before and after recent global financial crisis from
the international portfolio diversification perspective. The study applies the concept of cointegration
and uses Morgan Stanley Composite Index (MSCI) data for analysis, and the period of investigation is
January 1992 to April 2014. The global indices which are sampled in the study are large and mid cap
MSCI of USA, Japan, Singapore, Hong Kong and India. The findings of this study are very interesting
and suggest the presence of strong long-term integration but the absence of short-term integration of
Indian stock markets with global markets.

Keywords
Global integration, cointegration analysis, international diversification, emerging markets

Introduction
Stock markets present an opportunity to investors for earning excess returns, and with liberalization,
increased trade, easing up of statutory controls and technological advances across the world, investment
has become seamless and borderless. This motivates the investors to diversify their investments with
the twin objectives of earning higher excess returns by investing in new and emerging markets, and
risk diversification. The benefits of international portfolio diversification largely depend on the level
of integration of stock markets of different countries. A complete integration of capital markets
should imply the absence of arbitrage opportunities (Akdogan, 1992), resulting in reduced benefits from

1
International Management Institute, New Delhi, India.
2
Jaipuria Institute of Management, Noida, Uttar Pradesh, India.

Corresponding author:
Prashant Gupta, International Management Institute, B-10, Qutab Institutional Area, Tara Crescent, New Delhi 100 016, India.
E-mail: prashantgupta@imi.edu
1128 Global Business Review 16(6)

portfolio diversification. The greater impact, however, is on the financial stability of the countries
(Ibrahim, 2005), as risks of one market also seamlessly spill over to the other countries.
Researchers and policy makers are attempting to understand the changing integration behaviour of
developed markets with emerging markets in the light of structural changes that have taken place in the
last two decades. The global financial economy is witnessing unprecedented challenges since the East
Asian crisis of 1997 and the subprime crisis that surfaced in 2007; the contagion effects have been
massive and long-lasting, possibly due to increased stock market integration. All the developed and
emerging economies simultaneously witnessed massive wealth erosion. The study investigates the scope
and benefits of stock market integration in the developed and emerging markets of the US, Japan,
Singapore, Hong Kong and India before and after the recent global financial crisis. The data is analyzed
beginning from 1992 till 2014, the rationale being that it allows for capturing the changes in market
integration for the period of pre-East Asian crisis, pre-US subprime crisis and post-subprime crisis.
In order to identify the change in behaviour, the period of investigation from January 1992 to
April 2014 has been divided into three sub periods—pre-East Asian crisis period (representing the
period between 1992 to pre-East Asian crisis in 1997), pre-subprime crisis period (representing
the period between post-East Asian crisis in1997 to pre-US subprime crisis in 2007) and post-subprime
crisis period (representing the period between US subprime crisis June 2008 to April 2014).
A battery of econometric tests has been employed to analyze short-run and long-run integration of
the markets under study. Johansen cointegration has been applied to analyze long-run integration and it
finds integration between stock markets in the long run, indicating the lack of opportunities for portfolio
diversification. On the contrary, in the short run, the degree of correlation is high for all markets except
for Japan, and the Granger causality test indicates that in the pre-subprime crisis period the degree of
causality is high; specifically, the US affects India and Japan. The causality reduces in the post-subprime
crisis period. The article proceeds along the following lines. The second section presents the review of
literature, the third section discusses the data, variables and the research methodology, the fourth section
discusses data analysis and results and the fifth section contains concluding remarks.

Theoretical Framework and Literature Review

Stock market integration has been a topic of great interest among researchers and practitioners since
long. The increased research interest stems from the opportunities provided to global investors for
portfolio diversification arising from stock market integration, implying options of profit-making
and reducing price risk. Grubel (1968) in his seminal work analyzed stock market indices of 11 industri-
alized countries and suggested that through investment in international markets an investor can earn
68 per cent higher returns as compared to investment solely in the New York Stock Exchange. These
findings of huge potential profits through international diversification are supported by Levy and Sarnat
(1970) who also suggested accelerated gains by including emerging markets in the international
portfolio. Lessard (1973) further analyzed portfolio diversification in Latin American countries suggest-
ing the superiority of multinational diversification within an investment union, over investment in single
countries. In the next three decades, numerous studies analyzed the integration of stock markets in the
developed economies of the US, Europe and Asia, the most prominent being Taylor and Tonks (1989),
Arshanapalli and Doukas (1993), Lin et al. (1994), Karolyi and Stulz (1996), Kim (2005), Forbes and
Rigobon (2002) and Brooks and Del Negro (2004).
More recently, the focus has increased to emerging market economies of Asia, Africa and Latin
America, with Arshanapalli et al. (1995) pioneering the research on Asian markets. The pieces of
Srivastava et al. 1129

evidence presented have been further tested for Asia by Park and Song (2001), Jang and Sul (2002),
Yang et al. (2003) and Tiwari et al. (2013). Elyasiani et al. (1998) examined market integration for
Sri Lanka, US and other Asian markets; Majid et al. (2007) and Karim and Karim (2012) analyzed
ASEAN integration and Guesmi (2012) investigated the Southeast Asian stock market. Lessard (1973),
Choudhry (1997), Chen et al. (2002), Heaney et al. (2002), Hunter (2006) and Guesmi et al. (2013)
examined market integration for Latin American countries; Maghyereh (2006) examined the inter-
dependence for four major Middle Eastern and North African emerging markets, Patev et al. (2006)
investigated the markets of Central and Eastern Europe and Kenourgios and Samitas (2011) analyzed
the emerging Balkan markets.
Numerous studies have focused on the analysis of integration of the Indian stock market with leading
developed and emerging markets across the globe. Increasing research evidence documents integration
of Indian stock market with global stock markets in the short run (Chittedi, 2010; Majid et al., 2007;
Mishra, 2002; Mukherjee & Mishra, 2007; Nath & Verma, 2003; Taneja, 2012) with the exception of
Siddiqui (2009) who does not find any clear relationship between the sampled stock markets in the
short run. Chittedi (2010) finds that in the long run, the Indian stock market is highly cointegrated with
developed countries’ markets; similar findings are reported by Mukherjee and Mishra (2007), Majid
et al. (2007), Bose and Mukherjee (2005), Siddiqui (2009), Taneja (2012) and Tripathi and Seth (2014).
On the contrary, Mishra (2002), Srivastava (2007) and Srivastava (2011) find no conclusive proof of
long-run integration of the Indian stock market with other stock markets of the world.
A preponderance of the literature indicates the increasing integration of global stock markets. It has
been found with more or less homogeneity that developed markets (led by the US) have significant influ-
ence over the emerging ones (Arshanapalli et al., 1995; Bhattacharyya & Banerjee, 2004; Bose &
Mukherjee, 2005; Chittedi, 2010; Choudhry & Lin, 2004; Chowdhury, 1994; Taneja, 2012). Eun and
Shim (1989) emphasis upon the influence of US stock markets exert over stock markets of eight
developed countries. Additionally, in the case of the Asian economies, dominantly in the period before
the financial crisis of 2008, Japan was found to be the most influential economy (see Bose & Mukherjee,
2005; Chittedi, 2010; Kim, 2005; Taneja, 2012). Nonetheless, few studies have not found any significant
cointegration among sample stock markets (see, for example, Elyasiani et al., 1998; Hilliard, 1979;
Khan, Ashraf & Ahmed, 2005; Mishra, 2002; Rao & Naik, 1990). Such high integration consequently
diminishes the potential benefits of portfolio diversification.
Initial research analyzed the co-movement of stock markets through a correlation technique
(Karolyi & Stulz, 1996). Over a period of time, more refined methods like cointegration,1 vector
autoregression (VAR),2 Wavelet analysis,3 etc., have been employed to test stock market integration.
Kasa (1992), Chan et al. (1992), Arshanapalli and Doukas (1993), Allen and MacDonald (1995),
Gallagher (1995), Chan et al. (1997), Francis and Leachman (1998), Manning (2002), Chen et al. (2002),
Kenourgios and Samitas (2011) and Taneja (2012) applied cointegration for investigating the long-run
relationships between international stock markets. Prior to the application of Johansen cointegration,
many studies applied VAR techniques, including cointegration, Granger causality, impulse response
analysis and forecast error variance decomposition to analyze the market integration (see, for example,
Arshanapalli et al., 1995; Eun & Shim, 1989; Janakiramanan & Lamba, 1998; Kasa, 1992; Yang et al.,
2003). Wavelet analysis has been applied in various studies as it enables analysis in different time
frequencies of different types of investors: short term, medium term and long term (Fernandez, 2005;
Hsieh et al., 2011; Lee, 2004; Raghavan et al., 2010; Sharma & Rababaah, 2014; Tiwari et al., 2013).
Several studies attempted to highlight the effects of financial crisis on market integration and most of
those report an increase in correlation and integration post financial crisis, thereby reducing the benefits
of international portfolio diversification. Meric and Meric (1997), Arshanapalli and Doukas (1993) and
1130 Global Business Review 16(6)

Chan et al. (1997) analyzed European markets post 1987 crash; Arshanapalli et al. (1995), Park and Song
(2001) and Jang and Sul (2002) report evidence of Asian stock market indices after the Asian crisis of
1997; Patev et al. (2006) examined the effects of the Asian crisis (1997), the Russian crisis (1998) and
the Brazilian crisis (1999) on the integration of Central European stock markets. In the same light there
is a need to analyze the changes in stock market integration post the financial crisis of 2007. This study
divides the sample period into three sub-periods, namely, before the crisis, during the crisis and after the
crisis, with the aim of determining the market integration before, after and during the crisis.

Objective and Rationale of the Study

The study investigates the integration among the US and Asian stock markets with the objective of
determining short-run interdependence and the long-run integration of leading global stock markets
especially with Indian stock markets. It specifically aims at discerning the change in relationships, if any,
before the crisis, during the crisis and after the crisis.

Methodology
The data consists of stock market indices of USA, Japan, Singapore, Hong Kong and India. The data used
in the study is drawn from Morgan Stanley Capital International (MSCI) database, which maintains a
record of the daily levels of each country’s index. The study uses five MSCI indices and the monthly US
dollar returns are analyzed for the period between January 1992 and April 2014. The entire period of
research is divided into three sub periods—pre-East Asian crisis period (representing the period between
1992 and pre-East Asian crisis in 1997), pre-subprime crisis period (representing the period between post-
East Asian Crisis in1997 and pre-US subprime crisis 2007) and post-subprime crisis period (representing
the period between US subprime crisis June 2008 and April 2014).
The global indices which are sampled in the analysis are large and mid cap MSCI indices of USA,
Japan, Singapore, Hong Kong and India. The rationale of using MSCI data is that index calculation
methodology is standardized and if data is procured from local indices, it may have divergence due to
differences in base dates and formulae calculations and, thus, may not be fit for comparative study.
A description of the indices analyzed here is presented in Table 1. The merit of selection of these
indices derives from the fact that the US market is the strongest and the leading stock market of the world
with maximum market capitalization, followed by Japan. Hong Kong is Asia’s second largest stock
exchange after Japan and the sixth largest in the world, Singapore is the financial capital of Asia and
India is a promising emerging market of Asia.

Table 1. Description of the MSCI Indices

Country Index
USA USA Standard (Large + Mid Cap)
Japan Japan Standard (Large + Mid Cap)
Singapore Singapore Standard (Large + Mid Cap)
Hong Kong Hong Kong Standard (Large + Mid Cap)
India India Standard (Large + Mid Cap)
Source: Prepared by the authors.
Srivastava et al. 1131

Methodology Used
In order to achieve the stated objectives of analyzing short-run and long-run market integration, the
following research tools have been employed:

1. Normality: Using the Jarque Bera test and by analyzing the descriptive statistics, it can be
tested whether the data series is normally distributed. Test of stationarity will be employed if the
series is not normally distributed. The Jarque Bera test has been widely used for the stated
purpose (see, for example, Bose & Mukherjee, 2005; Siddiqui, 2009; Taneja, 2012).
2. Correlation: The Pearson correlation test is applied in order to identify the association between
the stock markets. Correlation would help in determining the nature of association among the
sampled stock markets. Being a preliminary test, correlation would serve as a basis for determining
specific interdependence in the market using sophisticated econometric analysis later.
3. Stationarity: It is a prerequisite to have stationary data series to employ time series analysis,
as non-stationary time series data can lead to unreliable and spurious results.4 To avoid the
problem of spurious regressions, it is necessary to test the order of integration of each variable
in time series analyses. For examining the stationary property of stock prices linkage among
the sampled Asian stock markets and the US market, both the augmented Dickey–Fuller (ADF)
and Phillips–Perron (PP) unit-root tests have been employed. To apply tests of market integration,
data stationarity is a prerequisite.
4. Cointegration: The Johansen cointegration test allows for the analysis of relationships between
financial markets in the long run. The null hypothesis is that the economic conditions in the
sample countries are the same and the markets have strong cointegration, which potentially limits
the benefits of international portfolio diversification.
5. Granger Causality: The Granger causality test is employed to analyze the short-run integration
behaviour of sample stock markets. It helps in identifying interdependency among stock markets
in the short run.
6. Variance Decomposition: Variance decomposition indicates the amount of information each
variable contributes to the other variables in the autoregression. It partitions the variance of the
forecast error of a certain variable into proportions attributable to shocks in each variable in
the system including its own, and can provide an indication of these relativities.

Analysis
Descriptive statistics of the four Asian countries and the US markets are given in Table 2. It can be
observed that in the pre-East Asian crisis period the returns are maximum for India followed by Singapore.
However, in the pre-subprime crisis period all markets pose negative returns and in the post-crisis period,
USA documents the maximum returns, while among the Asian markets, the return of the Indian market
is maximum. The volatility of all the sampled markets has increased significantly during the pre-subprime
crisis period in comparison to the pre-East Asian crisis and post-subprime crisis period. Although after
the crisis the volatility of the markets had come down, it could not reach the level of the pre-East Asian
crisis period in most of the cases. Among the sampled markets India has maximum volatility during the
pre-subprime crisis period. All markets exhibit negative skewness and leptokurtosis which indicates that
the returns of the indices are not normally distributed. This is furthermore explained through the values
of Jarque Bera, which is highly significant.
1132 Global Business Review 16(6)

Table 2. Descriptive Statistics

Standard
Period Mean Median Deviation Skewness Kurtosis Jarque-Bera
USA
Pre-East Asian Crisis 0.0016 0.00234 0.01849 –0.4874 5.87059 99.94*
Pre-subprime Crisis –0.0036 –0.0024 0.04264 –0.6462 6.87895 72.43*
Post-subprime Crisis 0.00241 0.00326 0.02115 –0.398 4.60537 31.31*
India
Pre-East Asian Crisis 0.00578 0.00959 0.02729 –0.8779 4.96049 75.32*
Pre-subprime Crisis –0.0022 0.00599 0.05249 –0.2495 3.52367 2.26
Post-subprime Crisis 0.00159 0.00222 0.02325 0.15168 2.79719 1.29828
Japan
Pre-East Asian Crisis 0.00158 0.00569 0.02504 –0.3778 2.85921 6.42*
Pre-subprime Crisis –0.005 –0.0024 0.04726 –1.853 12.6443 462.56*
Post-subprime Crisis 0.0017 0.00283 0.02783 –0.4495 3.80214 14.15*
Hong Kong
Pre-East Asian Crisis 0.00276 0.00406 0.02145 –0.1918 2.99784 1.6
Pre-subprime Crisis –0.0032 –0.0041 0.04982 –0.2548 3.78481 3.79
Post-subprime Crisis 0.00026 0.00295 0.02558 –0.0488 4.4049 19.34*
Singapore
Pre-East Asian Crisis 0.00317 0.00399 0.02 –0.1742 4.22201 17.55*
Pre-subprime Crisis –0.0032 –0.0053 0.04526 –0.1739 5.63855 30.69*
Post-subprime Crisis 0.00052 0.00157 0.01832 –0.2624 4.38102 21.27*
Source: Authors’ calculations.
Notes: ** Significant at 5 per cent; * significant at 10 per cent.

The correlation matrix of sampled markets in all the periods is given in Table 3. The result depicts
that in the pre-East Asian crisis period, except Japan all other Asian markets were significantly positively
correlated with the US market. During the pre-subprime crisis period, the correlation increased in all
markets, though it still remained insignificant for the Japanese market. In the post-subprime crisis period
the nature of correlation remained the same as the pre-subprime crisis period; however the degree of

Table 3. Correlation Matrix

USA India Japan Hong Kong Singapore

Pre-East Asian Crisis Period
USA 1
India 0.36** 1
Japan –0.048 –0.051 1
Hong Kong 0.46** 0.43** –0.092 1
Singapore 0.47** 0.36** –0.073 0.68* 1
Pre-subprime Crisis Period
USA 1
India 0.60** 1
Japan 0.14 0.21* 1
Hong Kong 0.71** 0.75** 0.15 1
Singapore 0.68* 0.74** 0.22* 0.90** 1
Srivastava et al. 1133

USA India Japan Hong Kong Singapore

Post-subprime Crisis Period
USA 1
India 0.53** 1
Japan 0.14* 0.094 1
Hong Kong 0.57** 0.65** 0.045 1
Singapore 0.59** 0.65** 0.13 0.78** 1
Source: Authors’ calculations.
Notes: ** Significant at 5 per cent.
* Significant at 10 per cent.

correlation reduced. Except for the Japanese market, other Asian markets were almost equally correlated
with the US market and reacted to change in its returns in the same way. However, no conclusion can be
drawn on the basis of analysis of correlation and, thus, high significant correlation warrants a detailed
analysis to find whether the phenomenon is short-lived or is valid in the long run as well. Lessard (1976)
in a study has explained the statistical limitation of correlation analysis, and a serial correlation issue
may lead to underestimating the correlation and misleading results of real cointegration. Consequently,
Granger causality and cointegration techniques need to be employed to decipher the correlation results
further for analysis of short-run and long-run effects, respectively.
In order to do a conclusive analysis in time series and to ensure the results are not spurious it is
imperative to have stationary data. A unit root test is applied to check for the stationarity of data with
a null hypothesis of non-stationarity and alternative hypothesis of presence of stationarity. Unit root
tests employed in the study are ADF test and PP test. The results of unit root tests are displayed in
Table 4. It clearly suggests that all of the series are integrated to order 1 I(1) in levels, meaning that they
are non-stationary in levels and stationary in first differences.

Table 4. Unit Root Test Results

Period ADF(I) ADF(T&I) ADF(None) PP(I) PP(T&I) PP(None)

USA Pre-East Asian Crisis –15.28* –15.28* –15.20* –15.45* –15.46* –15.27*
Pre-subprime Crisis –5.16* –5.29* –5.17* –10.35* –10.48* –10.38*
Post-subprime Crisis –14.57* –14.63* –14.54* –14.58* –14.63* –14.55*
India Pre-East Asian Crisis –14.40* –14.39* –13.89* –14.39* –14.39* –14.10*
Pre-subprime Crisis –10.20* –10.48* –10.22* –10.21* –10.48* –10.23*
Post-subprime Crisis –15.38* –15.36* –15.42* –15.48* –15.46* –15.52*
Hong Kong Pre-East Asian Crisis –16.64* –16.71* –16.40* –16.64* –16.73* –16.40*
Pre-subprime Crisis –10.10* –10.35* –10.10* –10.14* –10.36* –10.15*
Post-subprime Crisis –13.57* –13.54* –13.59* –13.55* –13.52* –13.57*
Singapore Pre-East Asian Crisis –16.07* –16.26* –15.76* –16.10* –16.30* –15.77*
Pre-subprime Crisis –10.69* –10.83* –10.63* –10.69* –10.81* –10.63*
Post-subprime Crisis –14.20* –14.27* –14.19* –14.18* –14.24* –14.17*
Japan Pre-East Asian Crisis –16.55* –16.65* –16.50* –16.58* –16.71* –16.52*
Pre-subprime Crisis –11.71* –11.79* –11.73* –11.69* –11.83* –11.73*
Post-subprime Crisis –16.11* –16.08* –16.12* –16.94* –16.93* –16.79*
Source: Authors’ calculations.
Notes: ** Significant at 5 per cent.
* Significant at 10 per cent.
1134 Global Business Review 16(6)

Table 5. Johansen Cointegration Test (among the Asian markets)

Hypothesized Trace 0.05

No. of CE(s) Eigenvalue Statistic Critical Value Prob.**
Pre-East Asian Crisis Period
None * 0.27 222.39 47.86 0.00
At most 1 * 0.24 140.55 29.80 0.00
At most 2 * 0.14 71.59 15.49 0.00
At most 3 * 0.12 31.65 3.84 0.00
Pre-subprime Crisis Period
None * 0.37 107.37 47.86 0.00
At most 1 * 0.31 61.55 29.80 0.00
At most 2 * 0.17 25.49 15.49 0.00
At most 3 * 0.07 6.99 3.84 0.01
Post-subprime Crisis Period
None * 0.27 212.81 47.86 0.00
At most 1 * 0.22 141.35 29.80 0.00
At most 2 * 0.18 85.03 15.49 0.00
At most 3 * 0.16 40.35 3.84 0.00
Source: Authors’ calculations.
Notes: Trace test indicates four cointegrating eqn(s) at the 0.05 level.
* denotes rejection of the hypothesis at the 0.05 level.
** MacKinnon–Haug–Michelis (1999) p-values.

If two or more variables of the same order d (where d > 0) are integrated, and there exists a stationary
linear combination of these variables, the variables are said to be cointegrated (Engle & Granger, 1987;
Johansen, 1988). As series are stationary (see Table 4), through the cointegration test the existence
of long-run linkages in the series would become evident. The results of the Johansen cointegration
test among the sampled Asian markets are given in Table 5. The trace test and maximum eigenvalue test
have been employed to analyze the long-term association. The null hypothesis is that the economic
conditions in these countries are same and these markets have strong cointegration. The result in
Table 5 suggests that null hypothesis of no-cointegration among the sample markets is rejected and, thus,
implies that the sampled Asian markets are cointegrated in the long term. The result also suggests that
the nature of cointegration of Asian markets has not changed in all the three periods.
The results of cointegration test which show that Asian markets are strongly cointegrated with US
markets as can be seen in Table 6. The findings are not very different here and the null hypothesis
is rejected, suggesting that Asian markets are integrated with US markets in the long term in all the
three periods. A perusal of findings of Tables 5 and 6 clearly suggests that there is no opportunity for
portfolio diversification in these markets.

Granger Causality Test

The Granger causality test is applied after the cointegration test to identify the degree and direction of
correlation in the short run among the sample markets, with the null hypothesis of no Granger causality.
The results of the Granger causality test for all the three periods are given in Table 7. The results
suggest that in the pre-East Asian crisis period (except in one case) Granger causality is not statistically
significant, implying that in the pre-East Asian crisis period the causal relationship between most of the
Srivastava et al. 1135

Table 6. Johansen Cointegration Test (including US markets)

Hypothesized Trace 0.05

No. of CE(s) Eigenvalue Statistic Critical Value Prob.**
Pre-East Asian Crisis Period
None * 0.32 316.57 69.82 0.00
At most 1 * 0.27 219.64 47.86 0.00
At most 2 * 0.22 139.33 29.80 0.00
At most 3 * 0.15 74.62 15.49 0.00
At most 4 * 0.12 33.42 3.84 0.00
Pre-subprime Crisis Period
None * 0.36 131.98 69.82 0.00
At most 1 * 0.32 87.62 47.86 0.00
At most 2 * 0.24 49.48 29.80 0.00
At most 3 * 0.14 21.92 15.49 0.00
At most 4 * 0.06 6.52 3.84 0.01
Post-subprime Crisis Period
None * 0.29 286.60 69.82 0.00
At most 1 * 0.26 207.29 47.86 0.00
At most 2 * 0.21 139.08 29.80 0.00
At most 3 * 0.17 84.70 15.49 0.00
At most 4 * 0.16 41.01 3.84 0.00
Source: Authors’ calculations.
Notes: Trace test indicates five cointegrating eqn(s) at the 0.05 level.
* denotes rejection of the hypothesis at the 0.05 level.
** MacKinnon–Haug–Michelis (1999) p-values.

Table 7. Granger Causality Test

Pre-East Asian Pre-subprime Post-subprime

Null Hypothesis Crisis Period Crisis Period Crisis Period
India does not Granger Cause USA 0.35 1.26 0.28
USA does not Granger Cause India 2.07 3.69* 0.84
Hong_Kong does not Granger Cause USA 0.53 0.07 0.46
USA does not Granger Cause Hong_Kong 1.61 11.34 2.78**
Singapore does not Granger Cause USA 0.63 1.75 1.34
USA does not Granger Cause Singapore 29.52 11.38 19.20
Japan does not Granger Cause USA 2.29** 1.49 0.90
USA does not Granger Cause Japan 0.21 5.13* 0.23
Hong_Kong does not Granger Cause India 0.79 6.22 1.01
India does not Granger Cause Hong_Kong 0.34 0.82 0.98
Singapore does not Granger Cause India 0.31 1.28 0.19
India does not Granger Cause Singapore 68.89 2.22 28.56
Japan does not Granger Cause India 2.09 1.47 4.08*
India does not Granger Cause Japan 0.60 1.59 0.81
Japan does not Granger Cause Singapore 74.39 4.53 26.72
Singapore does not Granger Cause Japan 1.32 0.07 1.34
Source: Authors’ calculations.
Notes: ** Significant at 5 per cent.
* Significant at 10 per cent.
1136 Global Business Review 16(6)

Asian markets is not significant. However, in the pre-subprime crisis period, the Indian market along
with Japan is also significantly related to the US market. In the post-subprime crisis period the US
market had no causal impact on Asian markets with the exception of Hong Kong, while interestingly
the Japanese market has a significant causal relationship with the Indian market. The result clearly
indicates that in the post-subprime crisis period Asian markets (except Hong Kong) have no causal
relation with US markets and the co-movements of markets has not increased during or after the
post-subprime crisis period.

Variance Decomposition Analysis

Table 8(a) presents the variance decomposition of the US market. The results indicate that in the pre-East
Asian crisis period, among the Asian markets, Japanese, Singapore and Indian markets explain around
1 per cent variance in US markets, while during the pre-subprime crisis period, maximum variance
is explained by the Japanese market (around 2 per cent). After the pre-subprime crisis period, the
Japanese market explained the variance in the US market to the tune of 1 per cent, while the rest of
the Asian markets had no significant explanation of variance in the US market.
Table 8(b) explains the variance decomposition of Indian markets. The results indicate that in
the pre-East Asian crisis period, maximum variance of the Indian markets was explained by the

Table 8(a). The Variance Decomposition of USA

Period S.E. USA India Hong Kong Singapore Japan

Pre-East Asian Crisis Period
 2 0.02 97.49 0.72 0.04 0.75 0.99
10 0.02 96.50 0.87 0.30 1.16 1.17
Pre-subprime Crisis Period
 2 0.05 97.41 0.36 0.33 0.00 1.89
10 0.06 96.15 0.53 0.61 0.27 2.45
Post-subprime Crisis Period
 2 0.02 98.29 0.05 0.28 0.28 1.11
10 0.02 97.05 0.41 0.42 0.62 1.51
Source: Authors’ calculations.

Table 8(b). The Variance Decomposition of India

Period S.E. USA India Hong Kong Singapore Japan

Pre-East Asian Crisis Period
 2 0.03 14.33 83.01 0.63 0.95 1.08
10 0.03 15.95 78.84 2.76 0.95 1.50
Pre-subprime Crisis Period
 2 0.05 56.99 41.47 0.78 0.22 0.55
10 0.05 57.66 39.24 0.88 0.28 1.94
Post-subprime Crisis Period
 2 0.03 40.66 56.86 0.51 0.07 1.90
10 0.03 40.62 56.10 0.58 0.15 2.54
Source: Authors’ calculations.
Srivastava et al. 1137

Table 8(c). The Variance Decomposition of the Hong Kong Market

Period S.E. USA India Hong Kong Singapore Japan

Pre-East Asian Crisis Period
 2 0.02 24.40  7.58 67.37 0.03 0.61
10 0.02 24.23  7.50 66.59 0.83 0.85
Pre-subprime Crisis Period
 2 0.05 53.51 26.59 17.92 0.00 1.98
10 0.05 54.22 24.08 16.12 0.19 5.39
Post-subprime Crisis Period
 2 0.02 42.92 20.91 35.20 0.01 0.96
10 0.02 43.11 20.35 34.66 0.45 1.43
Source: Authors’ calculations.

US market (around 15 per cent) followed by the Japanese market (around 1 per cent). This implies that
in the pre-East Asian crisis period, Indian markets’ variance was explained more by the US market
as compared to the Asian markets. However, during the pre-subprime crisis period, the variance
explanation by the US market went up significantly to the level of 58 per cent and the trend continues in
the post-subprime crisis period also, wherein the US market explains around 41 per cent of the variance
in the Indian market. The analysis of variance decomposition illustrates that Asian markets hardly
explain the variance in the Indian market in all the three periods; however, during and after the crisis, the
variance in the Indian market is largely explained by the US market.
The variance decomposition results of Hong Kong are shown in Table 8(c). The results show that in
the pre-East Asian crisis, crisis and post-subprime crisis period the variance of the Hong Kong market is
largely explained by the US market. However, during the pre-East Asian crisis period this explanation
was 24 per cent, which went up to 55 per cent in the pre-subprime crisis period and came down a little
to 43 per cent in the post-subprime crisis period. The variance in Hong Kong markets is also explained
by the Indian markets. In the pre-East Asian crisis period, this explanation is only 8 per cent, but in the
pre-subprime crisis period and the post-subprime crisis period it has gone up significantly to 27 per cent
and 20 per cent, respectively.
Table 8(d) shows the results of variance decomposition of the Singapore market. The results indicate
that in the pre-East Asian crisis period the variance in the Singapore market is explained to the tune of
27 per cent by the US market, 16 per cent by the Hong Kong market and around 8 per cent by the Indian

Table 8(d). The Variance Decomposition of Singapore

Period S.E. USA India Hong Kong Singapore Japan

Pre-East Asian Crisis Period
 2 0.02 26.79  8.33 16.44 47.99 0.44
10 0.02 25.40  8.14 16.17 46.82 3.46
Pre-subprime Crisis Period
 2 0.03  0.47  1.22  0.73 97.47 0.12
10 0.05 39.99 18.76  3.67 28.39 9.20
Post-subprime Crisis Period
 2 0.02  0.78  1.38  1.42 96.34 0.08
10 0.03 15.12  6.89  4.34 71.62 2.03
Source: Authors’ calculations.
1138 Global Business Review 16(6)

Table 8(e). The Variance Decomposition of Japan

Period S.E. USA India Hong Kong Singapore Japan

Pre-East Asian Crisis Period
 2 0.02  0.31  0.59 0.43 0.19 98.48
10 0.03  4.12  3.45 1.06 0.60 90.77
Pre-subprime Crisis Period
 2 0.04 44.06 14.47 1.28 1.80 38.40
10 0.05 43.58 14.41 1.48 1.86 38.67
Post-subprime Crisis Period
 2 0.02 34.31 10.49 5.21 0.70 49.29
10 0.02 33.97 10.69 5.22 1.11 49.00
Source: Authors’ calculations.

market. This means that the Singapore market variance is explained by both the Asian and US markets
but maximum explanation is by the Hong Kong market, followed by India and Japan.
Table 8(e) shows the variance decomposition results of Japanese markets. The results show that the
variance of the Japanese market is hardly explained by the sampled markets. The explanation by the US
market is 4 per cent and by the Indian market is 3 per cent in the pre-subprime crisis period, but the
explanation of variance in Japan by US and Indian markets has gone up significantly in the crisis and
the post-subprime crisis period. During the pre-subprime crisis period, the variance explanation by the
US and Indian market is 44 per cent and 14 per cent, respectively. In the post-subprime crisis period, this
explanation of variance by the US and Indian market is also very high at 34 per cent and 10 per cent,
respectively. However, in post-subprime crisis period explanation in variance in the Japanese market by
the Hong Kong market has also gone up to 5 per cent from around 1 per cent in the crisis and the pre-East
Asian crisis period.

Conclusion
The study with the objective of determining short-run and long-run integration among stock markets
analyzed the stock markets of USA, Japan, Hong Kong, Singapore and India during the period of crisis,
and the periods preceding and succeeding it. To analyze the interdependence among the sample stock
markets, cointegration test, Granger causality test and variance decomposition analysis have been
employed.
As documented in the literature, all stock markets exhibit negative skewness, leptokurtosis and high
Jarque Bera coefficient indicating that returns of indices are not normally distributed. Furthermore, all
Asian markets except Japan exhibit a positive correlation with the US in all three sub-periods, with the
degree of correlation increasing during the pre-subprime crisis period. The unit root tests (the ADF test
and PP test) find non-stationarity at levels. The Johansen cointegration test, applied to analyze the long-
term association in the markets, finds cointegration in Asian markets with and without including the US
across all sub-periods, implying lack of opportunities for portfolio diversification in these markets. The
Granger causality test analyzes the short-run causal relationship among sample markets; it finds an
insignificant causal effect in the pre-East Asian crisis period. However, during the pre-subprime crisis
period the US has a significant causal impact on India and Japan and in the post-subprime crisis period
causal impact on India is significant from Japan, while Hong Kong is impacted by the US.
Srivastava et al. 1139

The results indicate that the stock market integration has increased over time for the markets of
US, Japan, Hong Kong, Singapore and India. Moreover, the variance decomposition explains that the
variance of the US is not explained much by the sample markets, whereas for all Asian markets except
Japan the variance is significantly explained by the US market. It helps in providing a framework for
an international investor to form decisions on portfolio diversification.

Acknowledgement
The authors are grateful to the anonymous referees of the journal for their extremely useful suggestions to improve
the quality of the article. Usual disclaimers apply.

Notes
1. Cointegration methodology was developed by Engle and Granger (1987) and Johansen (1988).
2. The VAR model helps to discern the linkages amongst the indexes in the short run.
3. Wavelet analysis decomposes the stock market returns and volatility into different time scales with an aim to
unveil the underlying structure at different time horizons. This involves the separation of local dynamics from
the global dynamics and the transitory from the permanent dynamics. The stock market returns and volatility
can be analyzed separately in a succession of time scales, that is, on daily, weekly or monthly basis. Wavelet
analysis is being increasingly used to examine the returns, spillover effects and integration between stock
markets (Raghavan et al., 2012).
4. In econometric time series analysis, a series is said to be stationary when it has time-independent mean, variance
and autocorrelation that are constant through time.

References
Ahmad, K.M., Ashraf, S., & Ahmed, S. (2005). Is the Indian stock market integrated with the US and Japanese
markets? An empirical analysis. South Asia Economic Journal, 6(2), 193–206.
Akdogan, H. (1992). A suggested approach to country selection in international portfolio diversification. The
Journal of Portfolio Management, 23(1), 33–39.
Allen, D.E., & MacDonald, G. (1995). The long-run gains from international equity diversification: Australian
evidence from cointegration tests. Applied Financial Economics, 5(1), 33–42.
Arshanapalli, B., & Doukas, J. (1993). International stock market linkages: Evidence from the pre-and post-October
1987 period. Journal of Banking & Finance, 17(1), 193–208.
Arshanapalli, B., Doukas, J., & Lang, L.H. (1995). Pre and post-October 1987 stock market linkages between US
and Asian markets. Pacific-Basin Finance Journal, 3(1), 57–73.
Bhattacharyya, M., & Banerjee, A. (2004). Integration of global capital markets: An empirical exploration.
International Journal of Theoretical and Applied Finance, 7(04), 385–405.
Bose, S., & Mukherjee, P. (2005). A study of interlinkages between the Indian stock market and some other emerging
and developed markets (pp. 1–13). Indian Institute of Capital Markets 9th Capital Markets Conference Paper.
Retrieved 21 January 2015, from http://ssrn.com/Abstract=876397.
Brooks, R., & Del Negro, M. (2004). The rise in comovement across national stock markets: Market integration or
IT bubble? Journal of Empirical Finance, 11(5), 659–680.
Chan, K.C., Karolyi, G.A., & Stulz, R. (1992). Global financial markets and the risk premium on US equity. Journal
of Financial Economics, 32(2), 137–167.
Chan, K.C., Gup, B.E., & Pan, M.S. (1997). International stock market efficiency and integration: A study of
eighteen nations. Journal of Business Finance & Accounting, 24(6), 803–813.
Chen, G.M., Firth, M., & Rui, O.M. (2002). Stock market linkages: Evidence from Latin America. Journal of
Banking & Finance, 26(6), 1113–1141.
Chittedi, K.R. (2010). Integration of international stock markets: With special reference to India. GITAM Review
of International Business, 2(1), 1–16.
1140 Global Business Review 16(6)

Choudhry, T. (1997). Stochastic trends in stock prices: Evidence from Latin American markets. Journal of
Macroeconomics, 19(2), 285–304.
Choudhry, T., & Lin, Lu. (2004). Common stochastic trends among Far East stock prices: Effects of the
Asian financial crisis. Paper presented at European Financial Management Association 2004 Annual Meeting,
Basle.
Chowdhury, A.R. (1994). Stock market interdependencies: Evidence from the Asian NIEs. Journal of Macro-
economics, 16(4), 629–651.
Elyasiani, E., Perera, P., & Puri, T.N. (1998). Interdependence and dynamic linkages between stock markets of
Sri Lanka and its trading partners. Journal of Multinational Financial Management, 8(1), 89–101.
Engle, R.F., & Granger, C.W. (1987). Co-integration and error correction: Representation, estimation, and testing.
Econometrica: Journal of the Econometric Society, 55(2), 251–276.
Eun, C.S., & Shim, S. (1989). International transmission of stock market movements. The Journal of Financial
and Quantitative Analysis, 24(2), 241–256.
Fernandez, V.P. (2005). The international CAPM and a wavelet-based decomposition of value at risk. Studies in
Nonlinear Dynamics & Econometrics, 9(4), 1–37.
Forbes, K.J., & Rigobon, R. (2002). No contagion, only interdependence: Measuring stock market comovements.
The Journal of Finance, 57(5), 2223–2261.
Francis, B.B., & Leachman, L.L. (1998). Superexogeneity and the dynamic linkages among international equity
markets. Journal of International Money and Finance, 17(3), 475–492.
Gallagher, L. (1995). Interdependencies among the Irish, British and German stock markets. Economic and Social
Review, 26(2), 131–147.
Grubel, G. (1968). Internationally diversified portfolios: Welfare gains and capital flows. American Economic
Review, 58(5), 1299–1314.
Guesmi, K. (2012). Characterizing South-East Asian stock market integration through time. International Journal
of Business, 17(1), 99.
Guesmi, K., Nguyen, D.K., & Teulon, F. (2013). Further evidence on the determinants of regional stock market
integration in Latin America. European Journal of Comparative Economics, 10(3), 397–413.
Heaney, R., Hooper, V., & Jaugietis, M. (2002). Regional integration of stock markets in Latin America. Journal of
Economic Integration, 17(4), 745–760.
Hilliard, J. (1979). The relationship between equity indices on world exchanges. The Journal of Finance, 34(1),
103–117.
Hsieh, T.J., Hsiao, H.F., & Yeh, W.C. (2011). Forecasting stock markets using wavelet transforms and recurrent
neural networks: An integrated system based on artificial bee colony algorithm. Applied Soft Computing, 11(2),
2510–2525.
Hunter, D.M. (2006). The evolution of stock market integration in the post-liberalization period—A look at Latin
America. Journal of International Money and Finance, 25(5), 795–826.
Ibrahim, M.H. (2005). International linkages of stock prices: The case of Indonesia. Management Research News,
28(4), 93–115.
Janakiramanan, S., & Lamba, A.S. (1998). An empirical examination of linkages between Pacific-basin stock
markets. Journal of International Financial Markets, Institutions and Money, 8(2), 155–173.
Jang, H., & Sul, W. (2002). The Asian financial crisis and the co-movement of Asian stock markets. Journal of
Asian Economics, 13(1), 94–104.
Johansen, S. (1988). Statistical analysis of cointegration vectors. Journal of Economic Dynamics and Control, 12(2),
231–254.
Karim, B.A., & Karim, Z.A. (2012). Integration of ASEAN-5 stock markets: A revisit. Asian Academy of Manage-
ment Journal of Accounting and Finance, 8(2), 21–41.
Karolyi, G.A., & Stulz, R.M. (1996). Why do markets move together? An investigation of US–Japan stock return
comovements. The Journal of Finance, 51(3), 951–986.
Kasa, K. (1992). Common stochastic trends in international stock markets. Journal of Monetary Economics, 29(1),
95–124.
Srivastava et al. 1141

Kenourgios, D., & Samitas, A. (2011). Equity market integration in emerging Balkan markets. Research in
International Business and Finance, 25(3), 296–307.
Kim, S.J. (2005). Information leadership in the advanced Asia-Pacific stock markets: Return, volatility and volume
information spillovers from the U.S. and Japan. Journal of the Japanese & International Economies, 19(3),
338–365.
Lee, H.S. (2004). International transmission of stock market movements: A wavelet analysis. Applied Economics
Letters, 11(3/20), 197–201.
Lessard, D. (1973). International portfolio diversification: A multivariate analysis for a group of Latin American
countries. The Journal of Finance, 28(3), 619–633.
———. (1976). World, country, and industry relationships in equity returns: implications for risk reduction through
international diversification. Financial Analysts Journal, 32(1), 32–38.
Levy, H., & Sarnat, M. (1970). International diversification of investment portfolios. American Economic Review,
60(4), 668–675.
Lin, W., Engle, R., & Ito, T. (1994). Do bulls and bears move across borders? International transmission of stock
returns and volatility. The Review of Financial Studies, 7(3), 507–538.
Maghyereh, A. (2006). Regional integration of stock markets in MENA countries. Journal of Emerging Market
Finance, 5(1), 59–94.
Majid, M. Shabri Abd., Meera, Ahamed Kameel, & Omar, Mohd Azmi. (2007). Interdependence of ASEAN—5
stock markets from the US and Japan. Paper presented at the 20th Australasian Finance & Banking Conference.
Retrieved 21 March 2015, from http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1005287
Manning, N. (2002). Common trends and convergence? South East Asian equity markets, 1988–1999. Journal of
international Money and Finance, 21(2), 183–202.
Meric, I, & Meric, G. (1997). Co-movements of European equity markets before and after the 1987 Crash.
Multinational Finance Journal, 1(2), 137–152.
Mishra, A.K. (2002). International financial integration of domestic financial markets: A study of India. The ICFAI
Journal of Applied Finance, 8(2), 5–15.
Mukherjee, K., & Mishra, R.K. (2007). International stock market integration and its economic determinants:
A study of Indian and world equity markets. Vikalpa, 32(4), 4–29.
Nath, G.C., & Verma, S. (2003). Study of common stochastic trend and cointegration in the emerging markets—
A case study of India, Singapore and Taiwan (NSE Research Paper No. 72).
Park, Y.C., & Song, C.Y. (2001). Financial contagion in the East Asian crisis: With special reference to the
Republic of Korea. In S. Claessens & K.J. Forbes (Eds), International financial contagion (pp. 241–265).
Boston, MA: Kluwer Academic Press.
Patev, P., Kanaryan, N., & Lyroudi, K. (2006). Stock market crises and portfolio diversification in Central and
Eastern Europe. Managerial Finance, 32(5), 415–432.
Raghavan, M., Dark, J., & Maharaj, E.A. (2010). Impact of capital control measures on the Malaysian stock
market: A multiresolution analysis. International Journal of Managerial Finance, 6(2), 116–127.
Rao, B.S.R., & Naik, U. (1990). Inter-relatedness of stock markets: Spectral investigation of US, Japanese and
Indian markets—Note. Artha Vignana, 32(3&4), 309–321.
Sharma, D.K., & Rababaah, A.R. (2014). Stock market predictive model based on integration of signal processing
and artificial neural network. Academy of Information & Management Sciences Journal, 17(1), 51–70.
Siddiqui, S. (2009). Examining associations between S&P CNX Nifty and selected Asian & US stock markets.
NSE Research papers. Retrieved 13 March 2015, from http://www.nseindia.com/research/content/research_
initiative.htm
Srivastava, A. (2007). Cointegration of Asian markets with US markets international diversification perspectives.
Global Business Review, 8(2), 251–265.
———. (2011). An analysis of cointegration of Indian stock market with global markets. Asian Economic Review,
53(2), 217.
Taneja, Y.P. (2012). Stock market integration: A study of world’s major stock exchanges with special reference to
India. Vision: The Journal of Business Perspective, 16(2), 109–120.
1142 Global Business Review 16(6)

Taylor, M.P., & Tonks, I. (1989). The internationalisation of stock markets and the abolition of UK exchange
control. The Review of Economics and Statistics, 71(2), 332–336.
Tiwari, A.K., Dar, A.B., Bhanja, N., & Shah, A. (2013). Stock market integration in Asian countries: Evidence from
wavelet multiple correlations. Journal of Economic Integration, 28(3), 441–456.
Tripathi, V., & Seth, R. (2014). Stock market performance and macroeconomic factors: The study of Indian
equity market. Global Business Review, 15(2), 291–316.
Yang, J., Kolari, J.W., & Min, I. (2003). Stock market integration and financial crises: The case of Asia. Applied
Financial Economics, 13(7), 477–486.