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The purpose of this study is to examine the effect of the Severe Acute Respiratory Syndrome (S.A.R.S.) epidemic on the long-run relationship between China and four Asian stock markets. To this end, we first employ the advanced smooth time-varying cointegration model to investigate the existence of a time-varying cointegration relation among these markets and then employ the difference-in-differences approach to analyse whether or not the S.A.R.S. epidemic impacted the long-run relation between China and these four markets during the period 1998–2008, covering 5 years before and after the S.A.R.S. outbreak. Our results support the existence of a time-varying cointegration relation in the aggregate stock price indices, and that the S.A.R.S. epidemic did weaken the long-run relationship between China and the four markets. Therefore, stockholders and policy makers should be concerned about the influence of catastrophic epidemic diseases on the financial integration of stock market in Asia.
Chen et al. (Mon,) studied this question.