《An Empirical Analysis of Stock Market Integration-Comparison Study of Singapore and Malaysia》.pdf

The Singapore Economic Review, Vol. 54, No. 2 (2009) 217–232 © World Scientific Publishing Company AN EMPIRICAL ANALYSIS OF STOCK MARKET INTEGRATION: COMPARISON STUDY OF SINGAPORE AND MALAYSIA ZHENG YI School of Finance Southwestern University of Finance and Economics Chengdu, China 611130 SWEE-LIANG TAN School of Economics, Singapore Management University 90 Stamford Road, Singapore 178903 sltan@.sg Using a GARCH (1, 1) model, this paper compares the extent to which financial sector liberalization in Singapore and Malaysia each has led to integration of its domestic equity market with external markets. The results show that the level of integration of the domestic markets with the external markets is higher when MSCI regional and global data are used, as compared to when individual country data are used to proxy regional and global markets. Inferences are made about the preferred pace of liberalization in Singapore, as well as, the impact of the Asian financial crisis and capital control measures imposed in Malaysia on financial integration, in the respective countries under study. Keywords : Financial market liberalization; stock market integration; GARCH model; systematic risks; specific risks. 1. Introduction This paper measures the extent to which the process of financial sector liberalization in a country can lead to integration of its domestic equity market with external markets in the region and the major economies. The respective markets of Singapore and Malaysia are used as case studies. Both countries have a rich history of financial