Abstract
We propose a novel approach for generating global factors to measure global equity market integration using a panel data model with cross-sectional dependence (CD). Based on the previous literature, our global factors are obtained by explicitly controlling the effects of local factors of different regions in one asset pricing model, which further provides an integration measure based on the adjusted-R2. We empirically investigate the dynamics of global integration from 1990–2017 and find that (1) the integration measure based on the considered developed markets shows a slightly upward trend during our sample period, (2) the main driving force behind volatility in global integration arose from the Asia-Pacific (excluding Japan) region, and (3) integration between North America, Europe and Japan showed a relatively flat and moderate trend.
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