Interdependence of Souteast Asia Stock Markets : Analysis Based on Large Capital Index

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CHAPTER ONE

Introduction

1.0 Background of study

Nowadays, stock market has become a major part of investment for many countries especially in the west side of the world where stock exchange has become a core activity for the country and people. There are plenty of study that been conducted regarding stock market especially on the interdependencies among market but since 1997 Asian crisis, study regarding interdependencies of stock market between countries has been expanded and focuses on Asian market.

Stock or also called as equity is one type of investment vehicle or instrument that represents the ownership of certain entity or company. Stock is the most basic form of ownership for a corporation. Corporation issue stock to finance their business start-up costs and help pay for expansion and their ongoing business activities (Kapoor, 2012). The owner of stock or in other word, the shareholder has the right to claim to a part of company profit and earning. If people buy shares in a company, they will become a part owner of the company and be entitled to vote on company matters when public meetings are convened by the board of directors (Shamsy, 2001). Stock is one of the most liquid investments and also the foundation of nearly every portfolio due to its ability to transform into cash in the short term.

In other hand, Stock market is a place or platform where the stock being issued and trade among investor. Stock market is a catchall name for overall facilitation of the buying and selling of shares of ownership in the companies (wiley, 2001). Also known as the equity market, it is one of the most vital areas of a market economy as it provides companies with access to capital and investors with a slice of ownership in the company and the potential of gains based on the company's future performance. Generally, this stock market can be split or categorized into two (2) main sections which are primary market and secondary market. Primary market is where the stock being issued for the first time and the secondary market is where the issued stock being resells.

This stock market contains listed company thus the listed company will be categorized based on their market capitalization. Listed domestic companies are the domestically incorporated companies listed on the country's stock exchanges at the end of the year and this listed company does not include investment companies, mutual funds, or other collective investment vehicles. Market capitalization, also known as market value is the share price times the number of shares outstanding. There are several types of market capitalizations in the market such as large capital, medium capital and small capital and each type have their own requirement and limit.

Lately, the stock exchange activity not only been held within the country, but also has been expanded globally. As a result from the globalization, investigation about relationships between international stock markets has received much academic and practitioner interest over the last 30 years. The degree of international equity market integration has attracted much interest in recent years. Stock market integration can be defined as a condition in which stock markets in different countries trend together and depict same expected risk adjusted returns (Sharma, 2012). Stock market interdependence is due to the increase in capital flows across national boundaries, potential benefits from diversification of investment on an international level, and the existence of stock market leader and followers (Saini, 2002).

Enthused by the profound global effect of the October 1987 stock market crash and the 1997 Asian crisis, extensive research into the various aspects of international equity market relationships has transpired. The study of market interdependence holds important implications for the theory of financial economics, in particular, the degree to which markets are integrated determines the...
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