Abstract
This paper employs cointegration tests to identify the impacts of sequential opens of global equity market among the equity indices. We use the daily data of 31 major equity markets and explore the comovement relationship according to the sequence of the market open. This study also examines the impact of the 2008 global financial crisis to such comovement relationship. Our results indicate that the markets in Europe-Middle East, Asia-Pacific and Latin America, are less affected by the levels of earlier opens of other markets. After the end of 2007, the global equity market comovement pattern changed significantly, yet the interdependence of markets was not unanimously strengthened. The size of an equity market does not dictate its range and power of impact, as we find that a large size market can still be cointegrated with small size markets, while a small size market is almost always cointegrated with large size markets.
Highlights
The transmission of information and values among international stock markets refers to two systems of relationships: comovement of stock market prices, and contagion of market trends
Masih and Masih (2001), Jeon and Von Furstenberg (1990) and Arshanaoalli and Doukas (1993) documented a significant change in international stock market linkages after the 1987 financial crash. This violates a series of asset pricing theories, including the well-known Capital Asset Pricing Model and Fama-French three-factor model, which suggest that stock prices are related by a relative risk premium to a single market portfolio, but little support can be found for the proposition that all market portfolios in the various global markets share risk premium
This study reveals that the recent financial crisis has significantly changed international equity markets’ cointegration patterns
Summary
The transmission of information and values among international stock markets refers to two systems of relationships: comovement of stock market prices, and contagion of market trends. Masih and Masih (2001), Jeon and Von Furstenberg (1990) and Arshanaoalli and Doukas (1993) documented a significant change in international stock market linkages after the 1987 financial crash. This violates a series of asset pricing theories, including the well-known Capital Asset Pricing Model and Fama-French three-factor model, which suggest that stock prices are related by a relative risk premium to a single market portfolio, but little support can be found for the proposition that all market portfolios in the various global markets share risk premium. The motivation for this s tudy is to explain the contradiction between the observed comovements of global security markets and the existing asset pricing theory
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