Evidence of Global Financial Shocks Transmission: Changing Nature of Stock Markets Integration during the 2007/2008 Financial Crisis

Abstract

The study aims to empirically examine the nature of integration among the Malaysian stock market with two of the world’s biggest stock markets, namely the US and Japan, during the global financial crisis in 2007/2008. By assessing the changes in the nature of integration among these markets during the crisis, the study aims to find evidence on the international transmission of the financial shocks through the global stock markets. The study covers the period from September 1, 2006 to May 30, 2009. In efforts to capture the changing nature of integration among the stock markets, the sample period is divided into three subperiods, namely the pre-crisis period, during crisis period I and during crisis period II. In methodology, the study relies on the recent empirical tests of cointegration, impulse response functions and variance decomposition analysis. The study finds that the nature of integration among the these markets changes over the three periods due to the crisis. In particular, the markets are shown to be highly integrated at the initial stage of the crisis. However, as information became clearer and it is evident that the crisis is prolonged, investors opt for other types of investment than the equity markets, resulting in all the markets to perform independently.

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