The impact of crises, liquidity and contagion on stock market development: evidence from ASEAN – 5 countries

This study examines the effect of financial crises, stock market liquidity and contagion on stock market development (SMD) in the ASEAN – 5 countries using aggregate panel data over the period of 1990 – 2014. Mean comparison analysis is employed to test the SMD differences for pre – and post – crises period. Traditional panel analyses; Random Effects Model is utilized to test the effect of stock market liquidity on the SMD. Then, the Seemingly Unrelated Regression Analysis (SUR) is applied to examine the contagion effect of the United States’ stock market performance on the SMD of ASEAN – 5 countries. Results of mean comparison analysis show that the SMD of Malaysia, Thailand and Singapore are significantly different after Asian Financial Crisis in 1997–1998, reduction were also displayed in the SMD of Malaysia and Singapore after the Global Financial Crisis in 2008. Moreover, results of Random Effects Model signify that stock market liquidity has a significant effect on the SMD of ASEAN – 5 countries. On the contagion effect, SUR estimation results show that stock market performance of the United States significantly affects the SMD of Malaysia, Singapore and Thailand while the SMD of Indonesia and Philippines are affected by considering interaction term. Based on the findings, this study proposes to the policymakers the use of financial institutions reformation, bilateral banking integration, financial support mechanism and revision on crisis management frameworks as the precautionary measures against financial crisis. Moreover, ASEAN – 5 should encourage long – term investment, lowering investment costs and reforms the corporate governance in enhancing stock market liquidity. To reduce the contagion effects particularly from the US, macroeconomic policies responses, trade openness and the inspiration towards an integrated stock market are suggested for ASEAN – 5 countries.