Time-Varying Energy and Stock Market Integration in Asia

47 Pages Posted: 2 May 2017 Last revised: 24 Dec 2020

See all articles by Jonathan A. Batten

Jonathan A. Batten

RMIT University

Harald Kinateder

University of Passau

Peter G. Szilagyi

EDHEC Business School

Niklas Wagner

Passau University

Date Written: September 28, 2017

Abstract

The degree of integration between energy and stock markets is critical for the diversification and risk management decisions of global corporations and investors alike. We investigate the integration relation between ten major Asian stock markets and a diversified energy portfolio that comprises oil, coal and gas. Estimation of the relation in a time-varying asset pricing framework, which allows for regime switching, identifies two major regimes. The first regime represents periods of low energy-stock market integration, accounting for over two-thirds of the sample period during December 1992 to December 2015. The second regime represents periods of high integration, as characterized by limited diversification opportunities and increased levels of asset price volatility including increased exchange rate volatility. The two regimes also differ in the way equity markets price energy risk. Besides an energy-unrelated positive equity risk premium during the low integration regime, our results identify a significant positive energy-related equity risk premium during the high integration regime. Finally, we demonstrate that investors can use the conditional information of our integration model to outperform passive portfolio investment strategies in the stock and energy markets.

Keywords: Coal; Commodities; Energy Risk; Financial Market Integration; Gas, International Asset Pricing; Market Risk; Oil; Regime Switching Model

JEL Classification: F15, F2, F36, G10, G15

Suggested Citation

Batten, Jonathan A. and Kinateder, Harald and Szilagyi, Peter G. and Wagner, Niklas F., Time-Varying Energy and Stock Market Integration in Asia (September 28, 2017). Available at SSRN: https://ssrn.com/abstract=2961688 or http://dx.doi.org/10.2139/ssrn.2961688

Jonathan A. Batten (Contact Author)

RMIT University ( email )

Level 12, 239 Bourke Street
Melbourne, Victoria
Australia

HOME PAGE: http://https://www.rmit.edu.au/contact/staff-contacts/academic-staff/b/batten-professor-jonathan

Harald Kinateder

University of Passau ( email )

Innstrasse 27
Passau, 94032
Germany

HOME PAGE: http://sites.google.com/view/harald-kinateder

Peter G. Szilagyi

EDHEC Business School ( email )

24 Av. Gustave Delory
Roubaix, 59057
France

Niklas F. Wagner

Passau University ( email )

Innstrasse 27
Passau, 94030
Germany

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