Stock market integration in East and Southeast Asia: The role of global factors

This study explores the issue of financial integration among stock markets of ASEAN5 economies, plus China (mainland China and Hong Kong), Japan and South Korea (referred to as ASEAN5+4). Using both graph theory and a Vector Autoregressive (VAR)-based method, together with a rolling window approach, we show that the level of interconnectedness among these markets is high but with clear time varying patterns. A large share of this seemingly high level of integration is shown to be driven by common global factors. After filtering these factors from each stock market, the magnitude of interconnectedness falls substantially. Our results therefore suggest that stock market integration in East and Southeast Asia is not as strong as it looks. Although governments in this region have been promoting financial market collaboration and integration, barriers remain significant. The overestimated interconnectedness is mainly a simple reflection of stronger global influences on individual markets, while their interconnectedness attributable to non-global factors shows a descending trend after the crisis. •East and Southeast Asian stock markets integration is investigated using graph theory and a VAR approach.•Market interconnectedness shows clear time varying characteristics.•Level of integration substantially decreases after filtering the world stock market effects.•High interconnectedness is mainly contributed by common global factors.