THE ROLE OF IMPLICIT DETERMINANTS IN A HIGHLY LIBERALIZED EMERGING MARKET: EVIDENCE FROM MALAYSIA

While Malaysia has fulfilled expectation of a highly liberalized market since 2009, however, her stock market is still far from fully integrated with the world market. Existing literature by far has not provided any insight on market integration of such highly liberalized yet not perfectly integrated stock market. This paper explores whether such non-perfect market integration is due to some implicit factor at firm level. Based on Errunza, V and E Losq (1989). Capital flow controls, international asset pricing, and investors’ welfare: A multi-country framework. The Journal of Finance, 44(4), 1025–1037 asset pricing framework, we employed a multivariate GARCH-M model to estimate the monthly market integration level of Malaysia stock market with the world over a period from January 2009 to September 2016. Subsequently, we examine whether the three firm-level implicit factors, i.e., ownership concentrations, foreign ownership and firm price delay affect the Malaysia stock market’s world integration. These firm-level factors are aggregated from firm-level data while price delay was also aggregated from estimates of weekly data at firm level. In short, we found that price delay and ownership concentrations have significant negative effects on the market level integration, with the latter having a nonlinear U − shape effect where ownership concentration will have a positive effect passing the threshold of 52.2%. Last but not least, foreign ownership has a significant positive effect.