CHAPTER 1 INTRODUCTION

1.1. Object Overview 1.1.1 Indonesia Composite Stock Price Index The Composite Stock Price Index is usually abbreviated as IHSG in English is also commonly called the Indonesia Composite Index, ICI, or IDX Composite. The definition of a Composite Stock Price Index (CSPI) or the meaning of JCI is one of several stock market indices (stock markets) used by the Indonesia (BEI; formerly the Jakarta Stock Exchange (BEJ). The IHSG was first introduced on April 1, 1983, the function of the stock price index acts as an indicator that reflects the share price movements in the JSX in general (Oktarina, 2016).

1.1.2 Thailand Composite Stock Price Index The SET Index is a Thailand composite which is calculated from the prices of all common stocks (including unit trusts of property funds) on the main board of the Stock Exchange of Thailand (SET), except for stocks that have been suspended for more than one year. It is a market capitalization- weighted price Index which compares the current market value of all listed common shares with its value on the base date of April 30, 1975, which was when the Index was established and set at 100 point/ The SET Index calculation is adjusted in line with modifications in the values of stocks resulting from changes in the number of stocks due to various events, e.g., public offerings, exercised warrants, or conversions of preferred to common shares, in order to eliminate all effects other than price movements from the Index (Sutheebanjard and Premchaiswadi, 2010).

1.1.3 Philippine Composite Stock Price Index The PSE Composite Index, commonly known previously as the PHISIX and presently as the PSEi, is a stock market index of the Philippine Stock Exchange consisting of 30 companies. As the PSE’s only broad-base index, it is frequently seen as an indicator of the general state of the Philippine business climate, although its reliability as an indicator of the state of the broader Philippine economy has been put

11

into question. The stock exchange regularly revises the list, at least twice a year. The PSE Composite Index is always composed of 30 stocks (Murcia, 2014).

1.1.4 Singapore Composite Stock Price Index The FTSE (STI) is a capitalization-weighted stock market index that is regarded as the benchmark index for the Singapore stock market. It tracks the performance of the top 30 companies listed on the Singapore Exchange. It is jointly calculated by Singapore Press Holdings (SPH), Singapore Exchange (SGX) and FTSE Group (FTSE). The creation of the FTSE ST Index Series was intended to facilitate the creation of financial products such as institutional and retail funds, exchange-traded funds (ETFs), derivatives contracts and other index-linked products (Desfiandi et al., 2017).

1.1.5 Malaysia Composite Stock Price Index The FTSE KLCI, also known as the FBM KLCI, is a capitalization-weighted stock market index, composed of the 30 largest companies on the Bursa Malaysia by market capitalization that meet the eligibility requirements of the FTSE Bursa Malaysia Index Ground Rules. The index is jointly operated by FTSE and Bursa Malaysia. It was first introduced on 4 April 1986 as the Kuala Lumpur Composite Index (KLCI), with a base value of 100, dated on 1 January 1977. In 2006, Bursa Malaysia partnered with FTSE to provide a suite of indices for the Malaysian market, to enhance the KLCI. FTSE Bursa Malaysia KLCI was one of the indices created to replace the KLCI. The new dex was adopted on 6 July 2009, with the opening value taken from the closing value of the old KLCI on 3 July 2009. The enhancement will adopt the internationally recognized index calculation formula to increase transparency as well as making the index more tradable (Murthy et al., 2017).

1.1.6 China Composite Stock Price Index The SSE Composite Index also known as SSE Index is a stock market index of all stocks (A shares and B shares) that are traded at the Shanghai Stock Exchange. There are also SSE 180, SSE 50 and SSE Mega-Cap Indexes for top 180, 50 amd 20 companies respectively. SSE indices are all calculated using a Paasche weighted

12

composite price index formula. This means that the index is based on a base period is the total market capitalization of all stocks of that day. The Base Value is 100. The index was launched on July 15, 1991 (Han et al., 2019).

1.1.7 Japan Composite Stock Price Index The , or the Nikkei Stock Average, more commonly called the Nikkei or the Nikkei index for the Tokyo Stock Exchange (TSE). It has been calculated daily by the Nihon Keizai Shimbun (The Nikkei) newspaper since 1950. It is a price-weighted Index, operating in the Japanese Yen (JP¥), and its components are reviewed once a year. The Nikkei measures the performance of 225 large, publicly owned companies in Japan from a wide array of industry sectors. The Nikkei 225 began to be calculated on 7 September 1950; 70 years ago, retroactively calculated back to 16 may 1949. Since January 2010, the index is updated every 15 seconds during trading sessions (Chabachib and Witjaksono, 2011).

1.1.8 India Stock Market The NIFTY 50 is a benchmark Indian stock market index that represents the weighted average of 50 of the largest Indian companies listed on the National Stock Exchange. It is one of the two main stock indices used in India, the other being the BSE SENSEX. Nifty 50 is owned and managed by NSE Indices (previously known as India Index Services & Products Limited), which is a wholly owned subsidiary of the NSE Strategic Investment Corporation Limited. NSE Indices had a marketing and licensing agreement with Standard & Poor’s for co-branding equity indices until 2013. The Nifty 50 Index was launched on 22 April 1996, and is one of the many stock indices of Nifty. The NIFTY 50 index has shaped up to be the largest single financial producst in India, with an ecosystem consisting of exchange-traded funds (onshore and offshore), exchange-traded options at NSE, and futures and options abroad at the SGX. NIFTY 50 is the world’s most actively traded contract. WFE, IOMA and FIA surveys endorse NSE’s leadership position (Hussain and Atif, 2019).

13

1.2. Research Background The capital market is an institution that plays an essential role in the progress of a country. The stock and bond capital markets, which are traded, can later affect the growth of a company that provides income to the country. The capital market has an important role in the economy of a country because the capital market performs two main functions, namely first as a means for business funding or as a means for companies to get funds from the investor community (investors). In investing, an investor must consider several things in advance, one of which is the historical price of shares and the country's stock price index. In terms of investment, ASEAN countries have become one of the most favored places by investors in the world (Chabachib and Witjaksono, 2011). ASEAN is formed from 5 Southeast Asian countries, namely Indonesia, Thailand, Philippines, Malaysia, and Singapore. The Association of Southeast Asian Nations (ASEAN) was established in 1967 to promote political and economic cooperation and regional stability. ASEAN had held a Summit (Summit) in Singapore in 2007, which produced the ASEAN Charter (ASEAN Charter). At the signing of the ASEAN Charter, ASEAN leaders also signed the MEA (ASEAN Economic Community) blueprint which contained a strategic schedule for achieving the four pillars of the AEC (Ong and Habibullah, 2012). 1. ASEAN as a single market and international production base with elements of the free flow of goods, services, investment, skilled work arrangements, and a more open flow of capital. 2. ASEAN as a region with high economic competitiveness, with elements of competition rules, consumer protection, intellectual property rights, infrastructure development, taxation, and e-commerce. 3. ASEAN as a region with equitable economic development with elements of small and medium business development, and ASEAN integration initiatives for CLMV countries contained in the Initiative for ASEAN Integration. 4. ASEAN as a region that is fully integrated with the global economy with elements of a coherent approach to economies outside the zone, and increasing participation in global production networks. Apart from the underlying macroeconomic variables, international trade policies inevitably affect the stock markets (Öztürk and Altınöz, 2019). In particular,

14

free trade agreements are considered as a determinant of the stock returns. Trade agreements affect the main variable, such as exchange rates and stock prices between member countries through the real sector. For example, advantages may arise from increased commercial opportunities and greater competition (Daelemans et al., 2018). Also, these agreements provide an increase in trade with the removal of customs tariffs among the parties. Thus, both international capital flows and the stock returns of the exporting firms will increase (Haque and Sarwar, 2012). It has proven by many studies that stock prices are affected by both the national and international economic developments (Cauchie et al., 2004; Chackraborty et al., 2008; Haque and Sarwar, 2012; Ariff et al., 2012). Because of the globalization tendency that started in the mid-1980s and continues until today, the interdependence among the economic structures and the sensitivity towards external developments have increased. Especially, trade between countries is an essential element that increases this dependence. It is also closely related to trading companies and thus stock prices of these firms. Therefore, the policies followed by countries, which have mutual intense trade relations will have an impact on the markets of each other (Haque and Sarwar, 2012). A trade war happens when one country retaliates against another by raising import tariffs or placing other restrictions on the opposing country's imports (Öztürk and Altınöz, 2019). A tariff is a tax or duty imposed on the goods imported into a nation. In a global economy, a trade war can become very damaging to the consumers and businesses of both countries, and the contagion can grow to affect many aspects of both economies. For instance, the trade relationship between the United States and China has an ancient history, and today, China is among the top five trade partners of the United States. According to World Integrated Trade Solution, these are China, Mexico, Canada, Japan, and Germany (Ariff et al., 2012). However, Trump decided to implements conservative policies because the conventional trade system since the Second World War no longer served US interest. Thus, in 2018, the United States made the first move and decided to impose additional customs tariffs on some imported items. US-China trade wars started from this date, and the mutual moves continued. After the developments, China’s loss of the title to become the world’s second-biggest stock exchange is explained by the negative impact of tension between the US and China on the China stock returns. All this constitutes the starting

15

point of the study, and it is decided whether the tariffs will be included in the determinants of the stock prices, which is a topic frequently discussed in the literature (Öztürk and Altınöz, 2019).

Figure 1. The price movements from ASEAN-5, China, India, and Japan stock indexes in five years with an interval of one week. Source: Yahoo Finance, accessed 11 December 2019.

Figure 1 shows that, amid increasing globalization, international trade and capital mobility are hallmarks of cross-country market integration. A view briefly noted in one of the similar studies in this field: “It is generally believed that increased capital market integration should go hand-in-hand with increased cross-country correlation” (Bekaert et al., 2009, p. 2591). Such international capital market comovement “is a key topic in finance, as it has important implications for asset allocation, risk management, and international diversification” (Chuluun, 2017, p. 53). Therefore, the primary purpose of this study is to investigate if there is any correlation between Stock Indices across multiple Asia Countries as the chart indicates there are comovement for the last five years between the stock markets.

1.3. Problem Statement Over the years, there has been a lot of research conducted on linkages between asset markets in developed economies and emerging markets. Interaction or interdependence among markets has an important role in terms of predictability, 16

portfolio diversification, and asset allocation. In theory, capital gains can be achieved by utilizing international portfolio diversification if stock returns in the different markets are not perfectly correlated. However, on Asian Crisis, correlations are high as markets are in bearish condition. In addition to these short run relationships, there is a body of evidence suggesting capital markets share common trends over the long term (Kasa, 1992; Garrett and Spyrou, 1999). Correlations tend to rise with economic or equity market integration (Erb et al., 1994; Longin and Solnik, 1995; Goetzmann, et al., 2005) They also tend to decline in bull markets and increase during bear markets (Longin and Solnik, 2001; Ang and Bekaert, 2002).

1.4. Research Questions Following the information contained in the background and formulation of the problem, the research questions in this study are as follows: 1. Is there a cointegration of the stock exchange indexes in ASEAN-5 countries? 2. Is there a cointegration between ASEAN-5 and China, Japan, and India? 3. Which stock exchange index is the most dominant among ASEAN-5, China, Japan, and India?

1.5. Research Objectives The objectives of the cointegration analysis of the Stock Exchange Index are: 1. To identify the cointegration of the stock exchange indexes in ASEAN-5 countries in 2015 - 2019. 2. To analyze the cointegration between ASEAN-5, China, Japan, and India in 2015 - 2019. 3. To find out which stock market index is the most dominant among ASEAN- 5, China, Japan, and India.

1.6. Aims of Research

1.6.1. Business Aspects The existence of this research is expected to be used as a reference for potential foreign investors wishing to invest in the Asian market, especially in ASEAN-5 countries, China, Japan, and India. Moreover, it can be used as a material

17

consideration if an investor wants to diversify their investment by investing in several countries at once.

1.6.2. Academic Aspects As a reference and comparison for further research both from academics and non-academics. Especially when it relates to research in investment and portfolio analysis, the results of this research can be used as inputs and references to conduct further research in the future.

1.7. Research Scope

1.7.1. Location and Research Object This research is about the long-term relationship between the stock exchanges of ASEAN-5 countries and also other major Asian countries, namely China, Japan, and India. The daily stock price index of each country is used as a reference to see the cointegration between these countries.

1.7.2. Time and Period of the Research This research is being conducted since August 2019. The time period is chosen for the research object here is from January 2015 to December 2019.

1.8. Writing Systematic The writing structure is arranged to provide a general overview which is as follows:

CHAPTER I INTRODUCTION

This chapter contains an overview of the stock market indexes in ASEAN-5 countries, China, Japan, and India. This section also contains the research background, problem statement, research questions, research objectives, aims of the research, and scope of research and systematic writing.

CHAPTER II THEORIES AND FRAMEWORK

This chapter describes the theories that support this research project, which are the theories on the capital market, stock, stock index, market cointegration, globalization,

18

as well as the previous research on cointegration analysis. This part also contained the Research Framework of this paper.

CHAPTER III RESEARCH METHODOLOGY

In this chapter, the subject matter is a research method that contains the characteristics of the research, a collection tool used to obtain the data needed and the collection and source of the data, the stages of implementation of the study, the validity of the data that has been collected and data analysis techniques and hypothesis testing.

CHAPTER IV ANALYSIS AND RESULT

Research Results and Discussion containing the results of data processing by analyzing respondents of the research variables, statistical analysis, and analysis of the influence of variables.

CHAPTER V CONCLUSION AND SUGGESTIONS

Consists of restatement of the problem, brief description and procedure, principal findings and conclusions, and recommendations for further research.

19