Dynamic linkages among developed, emerging and frontier capital markets of Asia-Pacific region

Abstract

Purpose

The purpose of this paper is to investigate the long-run equilibrium relationship between developed, emerging and frontier markets of the Asia-Pacific region during January 2000 to June 2016.

Design/methodology/approach

Zivot and Andrews’ unit root test is used to examine the existence of unit root in index series in the presence of a structural break. Gregory and Hansen’s test of cointegration is employed to examine the stable long-run relationship between the indices under study.

Findings

The results suggest that the emerging markets of China and Thailand and the frontier markets of Sri Lanka and Pakistan are fairly segmented from most of the markets in the Asia-Pacific region. Hence, these markets provide good diversification opportunities to global investors. Bidirectional cointegration analysis indicates that emerging and frontier markets influence developed markets. Hence, it can be inferred that the de facto position that only bigger markets influence small markets no longer holds true in the current environment.

Practical implications

The findings of this study will provide valuable inputs to global investors for creating an optimal investment portfolio.

Originality/value

This study does a comprehensive examination of market integration in the Asia-Pacific region. It also contributes to the thin body of work done on frontier markets. Unlike past studies, this paper analyzes the bidirectional cointegration relationship to examine if the notion that only bigger markets influence smaller markets holds true or not. Finally, this study employs advanced techniques of unit root test and cointegration test that consider structural breaks in the models.

Citation

Thomas, N.M., Kashiramka, S. and Yadav, S.S. (2017), "Dynamic linkages among developed, emerging and frontier capital markets of Asia-Pacific region", Journal of Advances in Management Research, Vol. 14 No. 3, pp. 332-351. https://doi.org/10.1108/JAMR-10-2016-0088