Efficiency, Cointegration and Contagion in Equity Markets: Evidence from China, Japan and South Korea

This paper empirically examines whether three East Asian stock markets, namely, those of China, Japan and South Korea, are individually and/or jointly efficient, and whether contagion exists between the cointegrated markets. While individual market efficiency is examined through testing for the rand...

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Bibliographic Details
Published in:Asian economic journal 2009-03, Vol.23 (1), p.93-118
Main Author: Sohel Azad, A.S.M.
Format: Article
Language:English
Subjects:
C14
C32
cointegration
Cointegration analysis
contagion
Economic theory
Efficiency
G14
G15
Hypotheses
market efficiency
Random walk theory
Securities markets
simulation
Stock exchanges
Studies
unit root
variance ratio
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Summary:This paper empirically examines whether three East Asian stock markets, namely, those of China, Japan and South Korea, are individually and/or jointly efficient, and whether contagion exists between the cointegrated markets. While individual market efficiency is examined through testing for the random walk hypothesis, joint market efficiency is examined through testing for cointegration and contagion. The present study finds that the hypothesis of individual market efficiency is strongly rejected for the Chinese stock market, but not for the Japanese and the South Korean stock markets. However, when testing for cointegration, market efficiency is strongly rejected for all these markets. We take a simple case of contagion and find that although there is a long‐term relationship among the three markets, the contagion hypothesis cannot be rejected only between Japanese and South Korean stock markets, indicating short‐run portfolio diversification benefits from these two markets.
ISSN:1351-3958
1467-8381
DOI:10.1111/j.1467-8381.2009.02002.x