Abstract:
Over the past decades, ASEAN countries have made wide-ranging commitments
and concerted efforts to achieve greater financial integration. Despite these
efforts, the extant literature on equity market integration does not say much
about how the banking sector, in particular, has been evolving over the years.
Moreover, very little is known about the level of spillover effects in volatility and
conditional asymmetry across banking sector returns. This paper sets out to
address these issues using DCC-GARCH framework, and Granger-causality
approach. We apply a quantile-based estimate of conditional asymmetry and
examine its propagation across markets. Our findings confirm the evolving
nature of financial integration in the banking sector through rising correlation.
However, the correlation is of low magnitude across both ASEAN banking sector
returns and returns of non-ASEAN countries and irrespective of whether we use
a bivariate or multivariate model. This suggest possible gains in diversification.
The Granger-causality model supports the existence of feedback between the
volatilities of banking returns, where volatility in banking sector returns
spillover across the ASEAN markets and between ASEAN and other markets
outside the region. These volatility spillovers between the banking sector
returns suggest the possibility of a systemic event, although with a relatively low
probability. On the other hand, we find little evidence of spillover in terms of
conditional asymmetry, which suggests that asymmetry is mostly a local
phenomenon.
