Test on Asian Stock Market Linkages with Global Market: Based on the Time Varying Parameters Regression

This paper investigates the linkages of Asian stock market with global market using time varying parameters regression model. Monthly index return data of seven Asian countries (Japan, Singapore, Korea, Taiwan, China, India, and Vietnam) are tested during the period from 1997 to 2007. All of the index data are dollar denominated country index data provided by MSCI, except Vietnam index. Global market returns are measured as MSCI World Index return, MSCI Pacific index return, and MSCI US Index return. The major findings of this paper are as follows. First, the correlations between Asian index returns and global index returns vary significantly according to the sub-periods under consideration. The correlations are also affected by the status of classification as a developed country or an emerging market in the global index computation. Second, the estimator of hyper parameters of time varying parameters regression model shows that the ranges of variability of sensitivities of Asian index returns to the global index returns are different according to countries and global indices. Some of sensitivities are very stable, while others are very unstable. Third, the sensitivities of the developed country in Asia (i.e. Japan and Singapore) to the global index returns are relatively high (above 1.0) and stable, which implies high linkage of the developed country with the global market. But the sensitivities of the emerging market in Asia (i.e. Korea, Taiwan, China, and India) to the global index fluctuate within a wide range.