Diversifying in the Integrated Markets of ASEAN+3: A Quantitative Study of Stock Market Correlation

There is evidence that globalization, economic assimilation and integration among countries and their financial markets have increased correlation among stock markets and the correlation may in turn impact investors’ allocation of their assets and economic policies. We have conducted a quantitative study with daily stock index quotes for the period January 2000 and December 2009 in order to measure the eventual correlation between the markets of ASEAN+3. This economic integration consists of; Indonesia, Malaysia, Philippines, Singapore, Thailand, China, Japan and South Korea. Our problem formulation is:Are the stock markets of ASEAN+3 correlated?Does the eventual correlation change under turbulent market conditions?In terms of the eventual correlation, discuss: is it possible to diversify an investment portfolio within this area?The purpose of the study is to conduct a research that will provide investors with information about stock market correlation within the chosen market. We have conducted the study with a positivistic view and a deductive approach with some theories as our starting point. The main theories discussed are; market efficiency, risk and return, Modern Portfolio Theory, correlation and international investments. By using the financial datatbase, DataStream, we have been able to collect the necessary data for our study. The data has been processed in the statistical program SPSS by using Pearson correlation.From the empirical findings and our analysis we were able to draw some main conclusions about our study. We found that most of the ASEAN+3 countries were strongly correlated with each other. Japan showed lower correlation with all of the other countries. Based on this we concluded that economic integration seems to increase correlation between stock markets. When looking at the economic downturn in 2007-2009, we found that the correlation between ASEAN+3 became stronger and positive for all of the countries. The results also showed that the correlation varies over time. We concluded that it is, to a small extent, possible to diversify an investment portfolio across these markets.