Does Entropy Index Explain the Determinant of Capital Market Integration in ASEAN?

Research Question: This study will examine whether the entropy index by Ruefli (1990) could become the main determinant of capital market integration in ASEAN. Motivation: Continuing the study of Pretorius (2002) and Bracker and Koch (1999) who successfully used the correlation equation model to explore the capital market integration determinants in several regions, this study utilizes the correlation method to identify some new determinant of the capital market integration in ASEAN such as level of intra industry competition and intensity of role of global investors. Idea: This study is proposed a new thinking in the capital market integration i.e. when the capital market is integrated so thus there is no relevant for international diversification; but it will shift to the industrial diversification. Data: This study needs not only four data years 2006-2009 but also requires 10 industrial groups from the Global Industry Classification Standard (GICS) version from OSIRIS toward 5 ASEAN countries hence we obtain 240 data observations in order to employ SUR. Especially 10 industrial groups from GICS is used to estimate entropy index by Ruefli (1990) for each industry. Method/Tools: We must use SUR (Seemingly Unrelated Regression) and for estimation process is compliance to Zellner’s assumption that there should be a contemporaneous correlation of error from each equation of 5 ASEAN countries. Findings: we find that the entropy index of Ruefli (1990) is proven as an effective proxy for level of intra industry competition which functions as primary determinant of capital market integration in ASEAN. While the other finding is some stock market such as Malaysia looks so restrictive towards the existence of global investors. The finding confirms the result of Mitchell and Joseph (2010) and Omay and Iren (2019) about the strict foreign exchange control regime in Malaysia. Contribution: We are probably one of the market integration studies that obtain industrial structure becomes the main determinant of market integration through entropy index and we reconfirm the studies of Faff and Mittoo (2003), Roll (1992), Pretorius (2002), Carrieri et al. (2004) and Hwang and Sitorus (2014) which has considered about industry factors.