Dynamic co-movements of stock markets and implications for portfolio managers: evidence from wavelet approach

Purpose The stock market is an integral part of the financial system and is also known as the barometer of the economy due to its close relationship with the economic system of the countries. Stock markets have been affected by different financial shocks in the global economy over the past two decades. However, this study aims to investigate the co-integration between stock markets belonging to two regions, including emerging and Organization for Economic Co-operation and Development (OECD) stock markets, focused on Malaysia as the base economy for two decades. Design/methodology/approach We used the Morgan Stanley Capital International (MSCI) daily indices data from 1993 to 2021 for each stock market and compared the Malaysian stock market with its trading partner’s stock markets such as China, India, Pakistan, Singapore, Indonesia, the UK, the USA, Germany and France. Wavelet transformation is used as a method of estimation in the study. Findings Our findings show that there is a high-frequency co-integration (long-term equilibrium relationship in a short period of time) pattern between Malaysia and its trading partners' stock market indices during the Asian financial crisis (1997–1998), global financial crisis (2008–2009) and the period of COVID-19 (2020–2021). Moreover, Malaysia’s stock market has correlated highly with its emerging and OECD trading partners in both high- and low-frequency spectrums for the last two decades due to the different trade agreements and regional cooperation in various economic fields. Moreover, the United States of America is the most dominant economy that affects all emerging as well as the OECD economy stock markets in crisis. Research limitations/implications These findings are helpful for portfolio managers, investors, governments and policymakers around the globe. Portfolio managers use the research findings to invest in cointegrated markets to protect their investment and attain a high return. It is noted that the interdependence strength among selected stock markets increased during the shock period, suggesting a favorable indicator for investors that can attain long- and short-term benefits from their investments. Originality/value This study provides recent literature on co-integration between stock markets belonging to two regions, including emerging and OECD stock markets, focused on Malaysia as the base economy for two decades.