Does the financial cooperation agreement increase the interdependency among ASEAN+3 equity markets? A Markov switching approach

This paper aims to investigate the degree of interdependence among ASEAN+3 equity markets by employing Markov Switching approach and Johansen Cointegration test. The period is segmented into two periods; pre-agreement period and post-agreement period. The study shows several findings; 1) the regime changes and transition probabilities in ASEAN+3 equity markets during pre-agreement period are slow, 2) the equity markets of developed economies are more interdependent compared to emerging economies, 3) the degree of market inter-dependency improves during post-agreement period but is still weak, 4) the result of Markov Switching is re-confirmed by that of Johansen which shows that the ASEAN+3 equity markets strengthen interdependent relationship slightly during the post-agreement period. This study offers policy implications to strengthen the interdependent relationship so that ASEAN+3 economies can enhance the financial cooperation, develop the regional financial markets, and stabilizes the financial system as a remedial action to avoid a possible financial crisis.