Impact of the 2007 US financial crisis on the emerging equity markets

Abstract

PurposeThe purpose of this paper is to explore empirically the effects of the current financial crisis on the integration and co‐movements of selected stock markets of the emerging economies, namely Indonesia and Malaysia.Design/methodology/approachThe paper employs the standard time series technique and vector autoregressive framework.FindingsThe results of this paper support the general view that stock markets tend to show greater degree of integration or increased co‐movements during the crisis period, resulting in lesser benefit of diversification that can be gained by investors participating in these markets.Research limitations/implicationsThis paper only focuses on emerging equity markets of Malaysia and Indonesia.Practical implicationsThis paper reveals that unlike during the pre‐crisis period, the long‐run diversification benefits that can be earned by investors across the emerging equity markets of Indonesia and Malaysia during the crisis period tend to diminish.Originality/valueBy dividing the study periods into the pre‐crisis period and during the crisis period, it enables us to explore whether the cross‐market linkages between these markets change due to the crisis.