Financial Crisis of 2007 and Co-Integration of Global Markets

Abstract

Using a daily data set of stock market indexes and foreign exchange rates for twenty countries for a ten year period from July 02, 2001 to January 18, 2011, we analyze whether the global financial crisis of 2007 has any significant impact on the pattern of global market integration. Unit root tests of the stock market and foreign exchange show that these time series variables are, in general, I(1) process in all the three sample periods; (a) overall sample, (b) pre-crisis sample and (c) post-crisis period. Engle and Granger (1987) residual based cointegration test results show that impact of global financial crisis on market integration is heterogeneous in these three sample periods. Out of twenty countries, eight countries (Austria; Canada, Hong Kong, Malaysia, India, Korea Mexico and Norway) are cointegrated in all three periods while two others (Australia and China) are not cointegrated in any period. Remaining ten countries (Belgium, Brazil, France, Germany, Japan, Netherland, Sweden, Switzerland, Taiwan and United Kingdom) show variations in the cointegrating patterns across the three sample periods. Pedroni (2004) panel co-integration tests and Granger causality analysis exhibit similar patterns of cointegrating relationships.