Stock–bond co-movement in ASEAN-5: the role of financial integration and financial development

Purpose - This study aims to observe the extent of asset diversification benefits in the Association of Southeast Asian Nations (ASEAN)-5 market by examining the effect of financial integration (FI) and financial development (FD) on domestic stock–bond co-movements, SBcorr. Design/methodology/approach - The dynamic conditional correlation - multivariate generalized autoregressive conditional heteroskedasticity (DCC-MGARCH) technique is adopted to construct FI and stock−bond co-movement variables. Then, the study uses static panel data analysis to examine the effect of FI on stock−bond co-movements. Findings - FI does not provide asset diversification benefits due to high country risks in ASEAN-5. However, when FI is moderated by FD,FI × FD, the study shows thatFI × FDprovides higher asset diversification benefits in ASEAN-5. Originality/value - This study shows the importance of incorporating the level of FD when assessing the effect of FI on stock–bond co-movements in ASEAN-5. In the presence of FI, a well-diversified investor should always consider the state of FD, which will show a better representation of asset diversification strategy in the emerging markets. Additionally, policymakers of ASEAN-5 countries should prioritise enhancing their financial system to attract more investment into the countries.