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In order to examine potential benefits of international portfolio diversification across the

studied markets in the ‘long-run’ horizon, long-run cointegration tests are analyzed by comparing the results from the Johansen multivariate cointegration and the Engle-Granger bivariate cointegration tests. As discussed in section 1.2, the ASEAN Finance Ministers meeting (AFMM) in Manila are determined to have a greater financial integration in ASEAN, thus it is expected that the ASEAN markets are to be co-integrated. Therefore, the outcomes

from the ‘long-run’ cointegration tests are able to explain whether in the period of 2001 to 2010 of the ASEAN markets have been integrated or not.

As discussed earlier, the Johansen test is divided into two sections, the perspective of investors who are interested to invest across the ASEAN stock markets alone and the ASEAN and U.S. stock markets combined. Table 3 and 4 are presented to display the outcomes of the Johansen test. Two types of statistics are reported as well, the trace and maximum eigenvalue statistics. The critical values of Osterwald-Lenum (1992) are employed for the test statistics. The maximum number of cointegration (interdependence) relations for the six considered ASEAN markets is five, whereas for the seven markets from ASEAN and U.S. combined is six. The null hypothesis is that there is no cointegrating vector (rank/ relation) which is presented as r = 0. If this null is not rejected, then there is no cointegration relation and the hypothesis testing would be completed. However, if the first null of r = 0 is rejected, then the null of one cointegrating rank (H0: r = 1) would be tested and so on. Therefore, the number of

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interdependences between the considered markets is continually increased until the null is no longer rejected.

Table 3. Johansen Cointegration Test on ASEAN markets

H

H

Test Statistics Critical Values Trace Statistics Max-Eigen Statistics Trace Max-Eigen 5% 1% 5% 1% r = 0 r > 0 2496.972** 591.3767** 82.49 90.45 36.36 41.00 r ≤ 1 r > 1 1905.595** 552.2536** 59.46 66.52 30.04 35.17 r ≤ 2 r > 2 1353.341** 542.2228** 39.89 45.58 23.80 28.82 r ≤ 3 r > 3 811.1185** 485.7381** 24.31 29.75 17.89 22.99 r ≤ 4 r > 4 325.3804** 321.7030** 12.53 16.31 11.44 15.69 r ≤ 5 r > 5 3.677401 3.677401 3.84 6.51 3.84 6.51

* and * denote significance at 5% and 1% level respectively. The optimal lag length in the VAR model is chosen by AIC and SBIC.

Table 4. Johansen Cointegration Test on ASEAN and U.S. markets

H

H

Test Statistics Critical Values Trace Statistics Max-Eigen Statistics Trace Max-Eigen 5% 1% 5% 1% r = 0 r > 0 3025.069** 620.1357** 109.99 119.80 41.51 47.15 r ≤ 1 r > 1 2404.933** 580.7994** 82.49 90.45 36.36 41.00 r ≤ 2 r > 2 1824.134** 550.2663** 59.46 66.52 30.04 35.17 r ≤ 3 r > 3 1273.868** 511.1481** 39.89 45.58 23.80 28.82 r ≤ 4 r > 4 762.7196** 455.3567** 24.31 29.75 17.89 22.99 r ≤ 5 r > 5 307.3629** 304.2944** 12.53 16.31 11.44 15.69 r ≤ 6 r > 6 3.068522 3.068522 3.84 6.51 3.84 6.51

* and * denote significance at 5% and 1% level respectively. The optimal lag length in the VAR model is chosen by AIC and SBIC.

The Johansen multivariate cointegration results for investors who are interested in investing across ASEAN markets are presented in Table 3. The trace and maximum eigen-value statistics indicate the existence of five cointegrating relations at the 1% level of significance. In particular, if the trace statistics or the maximum eigen-values statistics are greater than the Osterwald-Lenum critical values, then the contemplated null hypothesis would be rejected.

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This process is to be repeated until the null of r ≤ 5 is not rejected, indicating that there is an existence of five cointegrating vectors across the ASEAN markets. Therefore, from an investment perspective, this means there are no potential benefits of international portfolio diversification across the ASEAN markets for those investors with long-run investment horizons.

Table 4 which combined U.S. market with ASEAN markets also indicates that there are no potential benefits of international portfolio diversification. This is due to the fact that the trace and maximum eigen-values test statistics cannot be rejected on the null of r ≤ 6, which means that there are six cointegrating relations in the system.

This study is of interest to gain further insight on the cointegrating relations between ASEAN and U.S. markets; therefore Table 5 presented displays the outcomes of Engle-Granger bivariate cointegration tests.

Table 5. Bivariate Engle-Granger Approach Bivariate

Relationship Indonesia Malaysia Philippines Singapore Thailand Vietnam U.S. Indonesia N/A Coint. Coint. Coint. Coint. Coint. Coint.

Malaysia Coint. N/A Coint. Coint. Coint. Coint. Coint.

Philippines Coint. Coint. N/A Coint. Coint. Coint. Coint.

Singapore Coint. Coint. Coint. N/A Coint. Coint. Coint.

Thailand Coint. Coint. Coint. Coint. N/A Coint. Coint.

Vietnam Coint. Coint. Coint. Coint. Coint. N/A Coint. Coint. = Cointegrated,

Table 5 displays interesting results since for each pair of countries in the relationship moves along together for the period of 2001 to 2010. The vertical side of table 5, which exhibits the name of country, omits the U.S market from the relationship. The reason behind this is since the ASEAN markets are considered not to have any influence in the U.S. stock market movement whilst not the other way around. The bivariate Engle-Granger results therefore confirm the results from the Johansen-Juselius model such that there are no potential benefits

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of international portfolio diversification across the ASEAN market and ASEAN and U.S. markets combined for those investors with long-run investment horizons.

The findings from this paper are in favour by the studies from Ibrahim (2000), Cheng et al. (2003), Click and Plummer (2005) albeit their period of study is ranging from 1992 to 2002. However, according to Ibrahim (2008) with the studied period from 1988 to 2003, there is no evidence suggesting long-run co-movements across the ASEAN markets. Nevertheless, the outcomes from this paper can be argued that although the Southeast Asia markets and Southeast Asia and U.S. markets combined are moving together in the long-term horizons, the benefits of diversifying portfolio will vanish. Further investigation is needed because although they were moving together it does not mean that all stock markets are expected to react identically to these trends. Therefore, the short-term of market co-movements is addressed below.