Are the Main and Second Board on the KLSE Integrated? Some Empirical Evidence

Abstract

Numerous studies have shown that in a fully integrated market, a large market has greater influence on a relatively smaller market. These findings suggest that prices in a larger market can be used to predict prices in the smaller market and subsequently, investors who use this information as a trading rule will reap abnormal rate of retums. The objective of the present paper is to determine the degree of market integration between the stock indices of the Main Board and Second Board of the Kuala Lumpur Stock Exchange. In this paper we employed a recently developed econometric technique on the cointegration of time series to examine the issue of market integration. Using monthly and weekly frequency data, our results suggest that the Main Board and Second Board of the Kuala Lumpur Stock Exchange are not cointegrated. This indicates that there is no long run relationship between the two stock indices. Since prices determined in jointly efficient markets cannot be cointegrated, the result ds consistent wich the efficient market Rypothesis.