Spillover Effects between Developed Stock Markets and ASEAN-5 Stock Markets
Understanding the volatility spillover is crucial for asset allocation decisions, in executing hedging strategies and for devising policies related to capital inflow in the market. This paper examines the mean and volatility spillover effects from the developed countries, namely the US, the UK and Japan to five ASEAN countries; Malaysia, Thailand, Indonesia, Singapore and the Philippines. Investigation has also been carried out on the spillover effect from the ASEAN countries to the developed countries. This study considers the spillover effect across markets in time-varying volatility framework since the findings reveal the unsuitability of constant variance ARMA model. The empirical results show that the returns at ASEAN stock markets are more influenced by Japan and the US than the UK. Significant volatility spillover is observed from regional leading market, Japan to all ASEAN countries. In terms of volatility, the world leading market, the US and the UK only affect certain ASEAN markets. On the influence of smaller markets on larger markets, the returns of Japan stock market are positively and significantly influenced by all five ASEAN markets. Meanwhile, the returns of the US and the UK stock markets are affected by Thailand, Singapore and the Philippines stock markets. In general, the volatility in ASEAN markets does not spill to the developed markets under investigation.
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