Co-Integration Approach: Relationship between Asia-Pacific and USA Stock Markets during the Financial Crisis of 2008? An Empirical Study

Abstract

This paper investigates stock market integration by studying Asia-Pacific stock markets during the subprime mortgage meltdown which created the world-wide financial crisis in 2007-09. This crisis had one of the most devastating impacts on the stock markets all over the world. During that time, Asia-Pacific markets were also hit by negative forces but no investigation was conducted before studying the situation. Unit root test, Johansen multivariate co-integration test and Short-Run Granger Causality based on vector error correction model (VECM) were used in the attempt to find the linkage between Asia-Pacific markets and the developed market of USA. The question this paper seeks whether there was any co-integration between the USA and Asia-Pacific markets during the crisis. The results will give a glimpse at the forces which dominate the emerging Asia-Pacific markets for investors, policymakers and stakeholders who are getting ready for the next future financial crisis.