The Impact of Structural Breaks on the Integration of the Asean-5 Stock Markets

Abstract

This paper examines the ASEAN-5 countries and explores the impact of structural breaks on the level of financial integration in that region. An extended cointegration procedure allowing for three types of structural break, is employed and compared with the standard Johansen procedure, for daily and weekly returns. The empirical results suggest a higher level of integration within the ASEAN-5 markets than previously found, suggesting that financial risk reduction benefits from diversifying investments across the region are less than previously thought. Further, Singapore and Thailand are the main long-term drivers in the region; Malaysia and Indonesia are more short-term drivers. Structural breaks are found to correspond with the Asian financial crisis in 1997/98 and a possible Y2K effect in late 1999. Results are verified using another structural break model and method, where break dates are treated as known.

Keywords: cointegration, rank, structural break, Asian financial crisis, stock market.

JEL Classification: C12, C22, C32, F36, G15