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Efficiency, Cointegration and Contagion in Equity Markets: Evidence from China, Japan and South Korea

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This paper empirically examines whether three East Asian stock markets, namely, those of China, Japan and South Korea, are individually and/or jointly efficient, and whether contagion exists between the cointegrated markets. While individual market efficiency is examined through testing for the random walk hypothesis, joint market efficiency is examined through testing for cointegration and contagion. The present study finds that the hypothesis of individual market efficiency is strongly rejected for the Chinese stock market, but not for the Japanese and the South Korean stock markets. However, when testing for cointegration, market efficiency is strongly rejected for all these markets. We take a simple case of contagion and find that although there is a long-term relationship among the three markets, the contagion hypothesis cannot be rejected only between Japanese and South Korean stock markets, indicating short-run portfolio diversification benefits from these two markets.
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Keywords: C14; C32; G14; G15; cointegration; contagion; market efficiency; simulation; unit root; variance ratio

Document Type: Research Article

Publication date: March 1, 2009

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