We found that each of the ten emerging stock markets of Asia generated both lower returns and higher risk than the U.S. stock market for the recent nine-year period of the study. Second, we find that the emerging markets of Asia have become more integrated with the U.S. stock market over this period. However, the three South Asian stock markets continue to be fragmented from the U.S. stock market, and therefore these markets appear to present risk reduction opportunities for U.S. investors. Numerous researchers (for example, Lee and Kim (1993-94), Meric and Meric (1998)) report that, in recent years, we have witnessed increased integration of world stock markets, resulting in increased correlations among national stock markets. Additionally, Kim and Haque (2002), and Saunders and Walter (2002) have demonstrated that the emerging markets have become more integrated with the developed markets in recent years, and therefore the emerging markets should no longer be considered a separate asset class. Meric and Meric (1998) find that correlations among national markets actually increased substantially following the October 1987 stock market crash. Lee and Kim (1993-94) report that the correlations between the U.S. stock market and foreign markets generally increase during periods of instability. These findings are troublesome for U.S. investors, as the primary motivation for investing internationally is to reduce risk, especially during periods of high volatility in the domestic stock market. Our findings support the conclusions of prior published reports indicating that, in general, emerging markets have recently become more integrated with the developed markets. However, we feel that some emerging markets may be uniquely different from others, even if, as in our sample, the markets all belong to the same geographical region. For example, the ten countries that are considered the emerging markets of Asia have unique characteristics. These ten nations have heterogeneous characteristics with regard to such attributes as political system, culture, population, and size of the economy. Therefore, these markets should be examined more carefully before concluding that they represent a homogenous group. Recent reports indicate that approximately $20 billion is invested by developed countries in securities issued in underdeveloped countries. It appears that the emerging markets of Asia attract the largest proportion of this investment. Most of these stock markets are extremely small and highly volatile in comparison with the U.S. stock market. However, investment in the stock markets of these countries has increased exponentially in recent years. This is because many believe that investments in these markets provide higher returns, albeit higher risks. Second, emerging stock markets are comparatively less integrated with the U.S. stock market than the developed stock markets are, and therefore provide greater opportunities for risk reduction by means of international diversification. Our initial objective is to compare the risk and return of the ten emerging stock markets of Asia, and to compare the performance of these markets with that of the U.S. stock market. Second, we compare he level of integration of each emerging market with the U.S. stock market. We are particularly interested in examining the level of integration during the recent period of comparatively poorer performance in the U.S. stock market. We collected monthly returns for all ten emerging stock markets of Asia from the Morgan Stanley Country Indexes (MSCI) web site. Each MSCI is the official price index of the emerging country and is reported in U.S. currency. Specifically, we collected index values for China, India, Indonesia, Korea, Malaysia, Pakistan, Philippines, Taiwan, Thailand and Sri Lanka. U.S. stock market returns for the same period are used for comparison purposes. The returns for all markets are for the nine-year period from January 1993 through December 2001. Therefore our overall sample period consists of 108 months of return observations for each country.
Integration of Stock Markets between Indonesia and Its Major Trading Partners
