Effects of political crises on cointegration between ASEAN-5 stock markets and the US stock market

Abstract

This study examines the level of cointegration of ASEAN-5 stock markets and the developed stock market of the USA. It also seeks to find out the effects of crises with a political nature on this cointegration. Five stock indices – SES, KLCI, STE, PSE and JSX – and the stock index of the NYSE were selected to represent the ASEAN-5 stock markets and the US stock market, respectively. Two political crises, namely September 11, 2001 and the 2003 US invasion of Iraq, were selected as the crises benchmarks of the study. Data cover a nearly ten-year period, after the Asian financial crisis to the end of 2007. In order to examine the effects of crises on stock markets, each series was divided into two periods of precrisis and postcrisis. The findings reveal that all ASEAN-5 stock markets, except Singapore, which is considered the most efficient stock market among the five, are highly sensitive to political crises which happen in the USA. The results also suggest that, in recent years, all ASEAN-5 stock markets have tended to be more efficient in their relationships with the US stock market.