Risk Diversification in Asian Stock Markets: An Empirical Analysis in the Context of the 2020 and 2022 Events

The World Health Organization (WHO) designated coronavi­rus infection a worldwide pandemic in 2020, based on the risk of contagion and the number of confirmed cases in more than 195 countries. Covid-19 had a severe impact on the global economy as a result of uncertainty and pessimism, causing adverse effects on financial markets. On February 24th, 2022, Russia launched a full-scale military invasion against Ukraine, signify­ing a dramatic escalation of a conflict that began in 2014. Several analysts named the invasion the largest military invasion in Europe since World War II. In the context of these events, this paper aims to estimate whether port­folio diversification is practicable in the stock markets of Indonesia (JKSE), Malaysia (KLSE), South Korea (KOSPI), Japan (NIKKEI 400), Philippines (PSI), Thailand (SET) and China (SSEC), for the period from September 18th, 2017 to September 15th, 2022. In the purpose of reaching such analysis it is intended to provide answers to two questions: (i) if the global pandemic of 2020 and the Russian invasion in 2022 have accentuated financial integration in these Asian markets? (ii) If yes, the existence of persistence in returns, could put portfolio diversification into question? The results indicate that those mar­kets have low levels of integration, both in periods of normality and in peri­ods of global uncertainty. Complementarily, the 2020 and 2022 events have significantly increased persistence in these regional markets. These results demonstrate that prices do not fully reflect available information and that changes in prices are not i.i.d. This situation has implications for investors, as some returns may be expected, creating some opportunities for arbitrage and windfalls profits. The authors consider that these results provide an op­portunity for regulators in these regional markets to take efforts to ensure better information between these markets and the international markets.