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Efficiency, Cointegration and Contagion in Equity Markets: Evidence from China, Japan and South Korea *
Author(s) -
Sohel Azad A.S.M.
Publication year - 2009
Publication title -
asian economic journal
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.345
H-Index - 28
eISSN - 1467-8381
pISSN - 1351-3958
DOI - 10.1111/j.1467-8381.2009.02002.x
Subject(s) - cointegration , economics , equity (law) , efficient market hypothesis , china , stock (firearms) , financial economics , market efficiency , stock market , diversification (marketing strategy) , random walk hypothesis , monetary economics , econometrics , business , biology , engineering , mechanical engineering , paleontology , horse , marketing , political science , law
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.