The paper examines the short run and long run price interdependences among the Asian Pacific equity markets, in the period surrounding the Asian financial crisis. The daily data composed of value weighted equity market indexes of Malaysia, Japan, Hong Kong and Australia, for the period from January 1997 to December 2000 are used. The unit root test, cointegration test, error correction model and causality test are conducted to examine the relationship among these markets. Our results show that there is a stationary long run relationship and significant short run causal linkage for certain cases among the Asian Pacific equity markets. Furthermore, the long run interdependence has strengthened since the onset of the crises. The causal relationships that exist between the developed, and emerging equity markets suggest that opportunities for international portfolio diversification in the Asian Pacific equity markets still exist.

The growing linkages of Asian capital market have been well documented in the literature over the last several years. Studies by Kwan et al. (1995) and Pan et al. (1999) have focused on the existence of common stochastic trends and volatility in the Asian Pacific equity markets. While Chan et al. (1992) on one hand has examined the temporal relationship between Asian Pacific stock markets and show that the stock markets’ indices are not cointegrated. The reason for high interest in the subject matter is that, development and growth of derivative securities has stimulated financial integration. The other factors are reduction in price volatility and narrower spreads through the existence of wider market participation. This has the potential of lowering the firm’s cost of capital. There is also growing evidences that larger financial sectors are less prone to shock than smaller financial sectors.

This paper is concerned with the growing interest in stock markets’ integration. More specifically, the study focuses on examining whether the stock markets in Asian Pacific region (Australia, Japan, Hong Kong and Malaysia) are integrated during the period 1997-2000.The study differs from the previous studies on capital market linkages, in several ways. This study emphasizes on both developed and emerging economies. Specifically, the study examines whether smaller market, especially Malaysia has been strongly influenced by the bigger players (or otherwise) in the Asian Pacific region, following the financial and currency crises which had spread across Asia. Indeed, the developed markets themselves are no longer isolated from the conditions in the emerging markets.

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