An analysis of volatility Co-Movement between Malaysia, US, UK, Japan and Hong Kong stock markets

Thangavelu, T. Shanmugam (2009) An analysis of volatility Co-Movement between Malaysia, US, UK, Japan and Hong Kong stock markets. Masters thesis, University of Malaya.

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This study investigates deeply on how the Malaysian stock market behaves on the international financial arena and how they react on different inflows of information and economic shocks from the international stock markets. Conspiringly, it encapsulate how stock market volatility has implications on financial and economic activities in Malaysia and the dynamics of major stock markets around the world can have ramifications on the Malaysian stock market. The stock price indices and returns of US, UK, Hong Kong, Malaysia and Japan were analysed over the period of year 2000-2008. Volatility co-movements of Malaysian stock market with US, UK, Hong Kong and Japan were estimated via Univariate GARCH model with asymmetric extensions and Vector Autoregression (VAR). It is found that EGARCH model is more suited to capturing volatility dynamics in all the five markets. Malaysia’s shock in earlier periods tend to linger around for a longer period than it does in other stock markets. This may imply that the Malaysian stock market shows less market efficiency. On the long term influences on volatility, it is interesting to note that all five markets exhibit very similar values, implying long term effects have similar influences on market volatility. As for the effects of good and bad news to the volatility, the impact has a much greater effect on Malaysia. The leverage effect is higher in the Malaysian and UK stock markets versus that is experienced in the other markets. On the whole, it can be seen that the Malaysian market is not very vulnerable to external volatility movements in major markets but is receptive to movements in Japan and US. VAR and Impulse Response Analysis were carried out to look at the extent to which multi-lateral interaction exists between these markets and the structure of interdependence simultaneously. It was found that Malaysia to be significant only with US and Japan and not significant with UK and Hong Kong. Malaysia has a close co-movement with Japan as the first lag is significant where else with the US market, the significance is only at the third lag. Malaysia’s response to shocks from US, Hong Kong and UK lasts for about one day and becomes insignificant. However, the magnitude of Malaysia’s response to shock from Japan is the highest with approximately four days. Shocks from US and UK did not make a sustained impact as the magnitude is between 0.01 and 0.03 only but Malaysia is most sensitive to shocks from Japanese market. The observation that the co-movements between the Malaysian market and other markets in the analysis is minimal is not in line with the findings in the existing literature as it has been observed that Asian markets are vulnerable to movements with the US market. Additionally, Malaysian returns does not much affect others is also quite contrary to the findings in the literature. The degree of co-movements indicates that there is still much scope for reaping risk minimization and return maximization benefits of portfolio diversification, at least in the short term by investing in Malaysia, as integration of the Malaysian market is not of a very high order. This leaves sufficient room for switching between mature markets such as that of US, UK or Japan.

Item Type: Thesis (Masters)
Uncontrolled Keywords: Stock market, International financial, Economic shocks, Stock volatility, Economic activities, Co-Movement
Subjects: H Social Sciences > H Social Sciences (General)
Date Deposited: 23 Jul 2013 01:03
Last Modified: 23 Jul 2013 01:03

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