Does trade matter for stock market integration?

Purpose – The purpose of this paper is to re‐examine the stock market integration and short‐run dynamic interactions between the Malaysian stock market and the stock markets of its major trading partners (the USA, Japan, Singapore, China and Thailand). Design/methodology/approach – Weekly stock indices spanning from January 1992 to May 2008 is analysed using autoregressive distributed lag (ARDL) bound testing approach and vector autoregression (VAR) framework. Findings – Stock markets of Malaysia and its major trading partners are found to be integrated. To some extent, it is found that trade does matter for stock market integration. Additional, geographical proximity and close relationship between the countries further contributes towards a greater integration between them. To move forward to a greater financial integration among these countries, trade liberalisation, including reduction or removal of trade and investment barriers would be necessary. Originality/value – This paper is among the first attempts to use ARDL and VAR frameworks to examine integration among the stock markets of Malaysia and its major trading partners. The findings of the study would shed some empirical lights for the purpose of policy making.