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

Purpose - The 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/approach - The paper employs the standard time series technique and vector autoregressive framework. Findings - The 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/implications - This paper only focuses on emerging equity markets of Malaysia and Indonesia. Practical implications - This 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/value - By 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.