Cointegration Analysis of the Indonesian Stock Exchange with the Stock Exchanges of the United States, China, and Southeast Asia

This research investigates the long-term cointegration and short-run causality among seven key equity indices—Dow Jones Industrial Average (United States), Shanghai Composite (China), Hang Seng (Hong Kong, China), IDX Composite (Indonesia), FTSE Straits Times (Singapore), FTSE Malaysia KLCI (Malaysia), and SET Index (Thailand)—to assess the effectiveness of geographical portfolio diversification amid increasing globalization and liberalization of financial markets. Utilizing daily closing price data from January 2007 to February 2025, the study applies the Johansen and Engle-Granger cointegration tests, as well as the Vector Error Correction Model (VECM), across three distinct periods: 2007–2009, 2020–2022, and 2007–2025. The findings reveal that, over the 2007–2025 period, there is significant cointegration between the Hang Seng (Hong Kong) and IDX Composite (Indonesia), suggesting limited diversification benefits between these markets in the long run. During 2020–2022, cointegration is also observed between the FTSE Straits Times (Singapore) and IDX Composite (Indonesia), as well as between the Hang Seng and IDX Composite. Additionally, VECM analysis for 2007–2009 uncovers short-run causality from the Hang Seng to the Shanghai Composite, indicating dynamic interdependence during that period. Overall, the results highlight that while some Asian equity markets exhibit integration, others remain segmented, underscoring the importance of monitoring cointegration patterns when making international investment decisions.