Modelling the linkages between the Australian and G7 stock markets: common stochastic trends and regime shifts

Abstract

This paper examines whether the Australian equity market is integrated with the equity markets of the G7 economies by applying both the Johansen (Statistical analysis of conintegrating vectors, Journal of Economic Dynamics and Control, 12, 231–54, ) and Gregory and Hansen (Residual-based tests for cointegration in models with regime shifts, Journal of Econometrics, 70, 99–126, ) approaches to cointegration. Some evidence of a pairwise long-run relationship between the Australian stock market and the stock markets of Canada, Italy, Japan and the United Kingdom is found, but the Australian equity market is not pairwise cointegrated with the equity markets of France, Germany or the USA.