Financial and Economic Integration's Impact on Asian Equity Markets’ Sensitivity to External Shocks


  • We are very grateful to Jan Wallanders och Tom Hedelius stiftelse and Bankforskningsinstitut for funding this research.

Corresponding author: Department of Economics, Lund University, Box 7082 S-22007 Lund, Sweden; Phone: +4646 222 8667; Fax: +4646 222 4118; E-mail:


This paper investigates the spillover effects from U.S. and regional stock markets on local stock markets in the Pacific Basin region and China. We also analyze if the spillover depends on countries’ financial and economic integration. We apply a stochastic volatility model with jumps in order to separate the spillover of extreme shocks from those of normal shocks. We find that the spillovers of both normal and extreme shocks are significant for almost all Asian countries except China. We also find that the time-variation in stock market interdependence can largely be associated with economic integration.