Global financial crisis and cyclical co-movements of Asian financial markets
| Date | 01 August 2016 |
| Pages | 465-495 |
| Published date | 01 August 2016 |
| DOI | https://doi.org/10.1108/JPIF-03-2016-0018 |
| Author | KimHiang Liow |
| Subject Matter | Property management & built environment,Real estate & property,Property valuation & finance |
Global financial crisis and
cyclical co-movements of Asian
financial markets
KimHiang Liow
Department of Real Estate, National University of Singapore, Singapore
Abstract
Purpose –The purpose of this paper is to investigate the cross-spectra of stock, real estate and bond
of ten selected Asian economies in the pre- and post-global financial crisis periods to detect whether
there is greater cyclical co-movement post-financial crisis, and whether any observed increased
co-movement measures the outcomes of contagion or integration.
Design/methodology/approach –Co-spectral approach is the proper econometric tool to deliver
economic insight for this research.
Findings –Results indicate that Asian stock markets, and to a lesser degree, bond and real estate
markets are more correlated post-financial crisis. Similarly, Asian financial markets have experienced
increased co-movements with the US financial markets post-financial crisis. Moreover, these observed
increased co-movements measure the outcomes of contagion in some cases of within-asset and cross-
asset classes, as well as for some cross-US-Asian asset factor relationships along the high-frequency
components of between two and four weeks. The stock markets are the most contagious, followed by
the real estate markets and bond markets.
Research limitations/implications –The results provide short-term investors with additional
co-movement information at higher frequencies in order to identify short-term fluctuations of
different asset classes. The empirical study also underscores the role of Asian real estate in
investment portfo lios in a mixed real estat e, stock and bond cont ext from a frequency do main
perspective.
Practical implications –The practical implication of this research is that benefits to investors from
international diversification may not be as great during the present time compared to previous periods
because financial/asset market movements have become more correlated. However, it does not imply
the complete absence of diversification benefits. This is because although cyclical correlations increase
in the short run, many of the values are still between low and moderate range, indicating that some
diversification benefits may still be realized.
Originality/value –In advancing the body of knowledge in international financial markets, this
research is probably the first study to consider a multi-asset class portfolio context that includes stock,
real estate and bond across the ten Asian economies and the USA in a single study. The frequency
domain analysis conducted in this paper adds to the understanding of real estate, stock and bond
market co-movement, integration and contagion dynamics, as well as the Asian cross-asset factor and
US-Asian asset factor relationships in global mixed-investing environment.
Keywords Global financial crisis, Contagion, Coherence, Asian asset markets,
Cross-spectral analysis, Public real estate
Paper type Research paper
1. Introduction
In this study we employ a unique weekly data set that includes the US and ten
Asian economies (both developed and emerging) over the period from June 28, 2000 to
June 27, 2007 (pre-crisis period) and from July 4, 2007 to July 2, 2014 (crisis/post-crisis
period)[1] to evaluate whether there is greater co-movement post-financial crisis
and whether the observed higher asset market co-movements can be attribute d to
integration or contagion by using a frequency approach to compare cross-spectral
Journal of Property Investment &
Finance
Vol. 34 No. 5, 2016
pp. 465-495
©Emerald Group Publis hing Limited
1463-578X
DOI 10.1108/JPIF-03-2016-0018
Received 19 March 2016
Revised 19 May 2016
Accepted 19 May 2016
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1463-578X.htm
465
Asian
financial
markets
of Asian public real estate, stock and bond for the two sub-samples. Contagion is
defined as a temporary increase of short scale co-movements within the frequency
domain context.
Our research motivation is derived from existing literature which indicates that the
GFC is an excellent empirical opportunity to study the changes in asset market
linkages and thus the effectiveness of international diversification for global investor s
in Asian stock, real estate and bond markets. Although it might appear that the answer
to the co-movement question is “yes”for stock markets and to a lesser extent bond
markets, because they have greater co-movement in economic downturns and during
periods of high volatility such as the GFC period, little is known whether real estate
markets are also associated with higher market co-movement during the crisis periods
and whether these higher movements are similarly observed among different
individual national real estate markets. On further reflection, our motivation is
particularly meaningful because although public real estate is part of domestic stock, it
has been increasingly regarded as a hybrid of stock, real estate and bond[2]. Moreover,
there is also strong evidence to suggest that public property has become increasingly
less sensitive to common stocks in developed countries (Ling and Naranjo, 2002).
Considering that public real estate are traded on major stock exchanges, its
inclusion in this study seeks to reflect the increasing important role of this new “asset”
class in domestic and Asian financial markets. The outperformance of public real esta te
in both their real estate investment trusts (REITs) and corporate forms, led to
increasing investors’awareness for this segment of the market. While the stock and
bond markets have become more and more integrated since the last decades, benefits
from diversification across international stock and bond markets decreased, both in the
long and in the short term. These stronger linkages between international stock
markets and between international bond markets prompted investors to search for
different opportunities to diversify their portfolio. In this context, real estate
investments have emerged to show low correlation with stocks and bonds and
therefore, have appropriate characteristics contributing to portfolio optimization
(Schindler, 2011). On a further note, Asian markets have been generally perceived as
having low exposure to global factors and therefore little integration with western
economies. Hence incorporating emerging Asian market stocks and bonds in an
investment portfolio was seen as part of attempting to increase returns and reduce
risks. However, recent studies on market integration suggest that national stock
markets and national bond markets have become much more correlated than in recent
decades. Some studies show that the GFC has been responsible for this high correlation
in more recent times. Our study on Asian mixed portfolios thus hopes to provide global
investors and academic researchers with comprehensive and meaningful empirical
insights into the topic of asset market co-movements and international diversification,
which includes real estate, by examining their patterns and magnitudes of cyclical
co-movement in the GFC context using the frequency domain approach, thereby
making the motivation of the paper stronger.
Our three specific research questions are:
RQ1. Whether there are increased cyclical co-movements post-financial crisis
among the Asian real estate markets, among the Asian stock markets, among
the Asian bond markets and across the Asian three asset types (real estate,
stock and bond)? Are the patterns and magnitudes of increased cyclical
co-movements similar?
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JPIF
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