IS INDONESIA MORE FINANCIALLY LINKED TO THE WORLD SINCE THE ASIAN FINANCIAL CRISES

The 1997-98 Asian financial crises brought significant changes to the Indonesian economy. The contagion originated in Thailand and spread throughout the region, indicating interdependencies of the Indonesian economy with the world’s economies but especially with those in the region. The crisis was channelled through the financial sector, which is assumed to be the most open sector in the economy. As a result, reform began and changes took place in many sectors and in the policies that guided them. How the financial integration changed over 15 years of reform is the main interest of this study. Specifically, this study analyses the changing financial integration in stock markets following the Asian crises. Therefore, the period of the study is in five parts, based on the origins of the US subprime and European crises. Using a quantitative approach, this study employs multivariate EGARCH-M(1,1) models. These models allow us to examine different effects of positive and negative news on financial risk in stock prices. Daily stock data are used from the Jakarta Stock Exchange (JKSE), the Singapore Exchange (STI), the Kuala Lumpur Stock Exchange (KLSE), the Shanghai Composite Index (SSE), Nikkei 225 (NIKK) (Japan), the Korea Stock Exchange (KOSPI), the Bombay Stock Exchange (SENSEX), the German stock exchange (DAX), the London FTSE, and Standard and Poor’s US (SP). The result of this study provides the figures showing the development of Indonesian financial-market linkage to other countries and will help the government to be aware of crises that are initiated by external factors, and to be able to manage future crises.