As risk diversification is the main concern for most investors, they tend to look into the possibility of broadening their investment activities across the countries or creating a region-based investment policy. This requires the understanding of regional and global linkages of stock markets. Specifically, this study makes an attempt to re-examine the co-movements among the Malaysian, Indian and Chinese equity markets. This study also includes the stock market linkages between Malaysia and the developed markets (the US and the UK) for a more meaningful argument with regard to the importance of market linkages among Malaysia, India and China. Statistical testing includes Johansen multivariate cointegration, Vector Error Correction Model (VECM) to a five-variable model, followed by Granger causality test. The results indicate that there is a long-run relationship among the regional markets. Malaysia and India Granger cause each other, however, this study is unable to detect China’s role in the regional market. In fact, in the Asian context, shocks in one country seem to have an effect in other countries for a very short period. Finally, the US market is still the main influential factor in the Asian markets.

The understanding of the market linkages among the international financial markets is especially important for investors be it for regional or global investment decisions. However, studies n market linkages tend to become more prevalent only when a specific region experiences a ‘shock’. Undoubtedly, the Asian region is vulnerable to ‘shocks’ (i.e., financial crisis) and as crisis is contagious, there is a need to understand the interdependency of its financial markets in order to get rid of the financial turmoil. It is to be noted that the Asian Financial Crisis began with the collapse of the Thai baht in July 1997 and further erosion in Hong Kong and other Asian markets in October 1997, and as a result, the co-movement among the Asian financial markets increased. Besides that, Ghosh et al. (1999) found that the volatility and co-movement of financial markets increased several months after the financial crisis. Choudhry (2001) indicated that stock returns of Asian stock markets could be predicted for the long run. Poon and Lin (2001) in their extensive work on 12 stock markets, noted that stock markets’ downturn could reduce the benefits of international diversification. Chaterjee and Maniam (2003) argued that significant correlation among the Asian markets may not be felt, especially in the presence ofeconomic shock due to their own returns behavior. However, the Asian markets tend to converge towards the long-term linkages. Nonetheless, it should be understood that despite its vulnerability to economic environment, the Asian region could be the major source of returns for investors if its market linkages are clearly understood. Hence, the knowledge of the Asian market linkages has to be incorporated into the international investment strategies.

Co-movement is defined as a pattern of positive correlation, but it is an ambiguous term and can be described by various types of relationships (Barberis et al., 2002). The co-movement of international equity markets has been raised to the common fundamental global factors. The global factors may include the worldwide liberalization of capital control, financial innovation, growing political and economic integration and financial crisis (King and Wadhwani, 1990). Masson (1998) found that the economic shocks in developed economies can have an effect on the emerging markets. This can also cause a downward trend in economic growth in the region. In addition, Ng et al. (2002) stated that another reason that caused co-movement in the market was macroeconomics condition. For example, recession in Singapore might dampen the demand for exports from other ASEAN countries and slow down economic growth in other ASEAN countries.

Applied Economics Journal, Regional Stock Markets, Risk Diversification, Vector Error Correction Model, VECM, Granger Causality Test, Asian Financial Markets, Financial Crisis, Investment Strategies, Financial Crisis, ASEAN Countries, Capital Asset Pricing Model, CAPM, Chinese Markets, Equity Markets, Augmented Dickey-Fuller, ADF, Financial Markets.