International Stock Market Integration Research Articles

A global look into stock market comovements

By investigating the developments and determinants of the dependence of domestic stock returns on latent global factors for 37 advanced and emerging countries during 1996–2015, this article illuminates contemporary trends in international finance with implications to the potential gains from international portfolio diversification and the independent effect of domestic monetary policy. There were upward time-trends in the dependences in the majority of the countries and at a global level, suggesting steady advances of international stock market integration or gradual declines of the potential gains from diversifying a stock portfolio internationally. The integration was greater in advanced countries than in emerging ones while progressing more rapidly in emerging countries than in advanced ones, suggesting relative attractiveness of emerging markets as an investment destination. An indication of a global financial cycle is that the degree of the dependences for different country groups changed over time in a similar fashion. Differences in those dependences across the countries and those over time were explained by the openness of international trade, the size of domestic stock market, and policies of monetary authorities: the level of short-term interest rates, the openness of the capital account, and the variability of foreign exchange rates. In that cycle, there emerged a dilemma between the mobility of international portfolio stock investments and the independent effect of domestic interest-rate policy over not only the sample period but also in the run-up to the 2008 crisis, as far as nominal short-term interest-rate differentials with respect to the United States were concerned.

A Multivariate GARCH Analysis on International Stock Market Integration: Korean Market Case

Financial integration is a phenomenon in which global financial markets are closely connected with each other. This article investigates the integration of Korean stock market with other stock markets using a multivariate GARCH analysis. We chose total seven countries including Korea for this paper based on the amount of export and then we chose major stock indices which can be thought as representative stock markets of those countries. The empirical analysis has shown that countries’ financial integration.

International Stock Market Integration: Central and South Eastern Europe Compared

We examine the international stock market comovements between Western Europe vis-a-vis Central (the Czech Republic, Hungary and Poland) and South Eastern Europe (Croatia, Macedonia and Serbia) using multivariate GARCH models in 2006-2011. Comparing these two groups, we find that the degree of comovements is much higher for Central Europe. The correlation of South Eastern European stock markets with developed markets is essentially zero. The exemption to this regularity is Croatia with its stock market displaying a greater degree of integration towards Western Europe recently, but still below the levels typical for Central Europe. All stock markets fall strongly at the beginning of the global financial crisis and we do not find that the crisis altered the degree of stock market integration between this group of countries.

International stock market integration: Central and South Eastern Europe compared

We examine the international stock market comovements between Western Europe vis-à-vis Central (Czech Republic, Hungary and Poland) and South Eastern Europe (Croatia, Macedonia and Serbia) using multivariate GARCH models in the period 2006–2011. Comparing these two groups, we find that the degree of comovements is much higher for Central Europe. The correlation of South Eastern European stock markets with developed markets is essentially zero. An exemption to this regularity is Croatia, with its stock market displaying a greater degree of integration toward Western Europe recently, but still below the levels typical for Central Europe. All stock markets fall strongly at the beginning of the global financial crisis and we do not find that the crisis altered the degree of stock market integration between these groups of countries.

International portfolio diversification: an ICAPM approach with currency risk

This article investigates international stock market integration in four major developed economies, namely the United States, the Economic and Monetary Union of the European Union, Japan and the United Kingdom, and two Asian emerging, countries namely China and India, over the period from June 1994 to June 2009. To model stock market integration we estimate a dynamic version of the international capital asset pricing model (CAPM) in the absence of purchasing power parity. Conditional variance is modelled via a multivariate GARCH specification. To investigate the evolution of integration overtime we estimate the CAPM in sub-periods. In addition, we connect our results to the timing of world financial crises. Our findings show that the stock markets tend to move in parallel after June of 2002, although from 2002 to 2006 there have not been crises events. These results support the increasing globalization and interdependence of both emerging and developed markets in the recent decade, reducing the benefits of portfolio diversification.

Foreign direct investment and international stock market integration

This paper examines whether foreign direct investment between countries fosters stock market integration. Empirical tests demonstrate that both the flow and the level of bilateral foreign direct investment between countries explain country-pair stock market integration. More specifically, higher bilateral foreign direct investment levels and flows increase Australia’s stock market integration with its major trade partners.

International Stock Market Integration and Its Economic Determinants: A Study of Indian and World Equity Markets

During the periods of globalization and deregulation, it has become very common for the equity market of a country to respond to the equity movements of its international trading partners from all over the world. The effort, trying to achieve in this study, relates to how Indian equity market responds to the equity price movements of other countries and vice versa. Also, the possible forces behind such interdependence among the markets are investigated. Daily closing prices of all the major equity indices from a sample of 23 countries, including India, for a period of 16 years starting from 1990 to 2005 have been used to assess the co-movement of prices among the markets. The results reveal the following : Apart from exhibiting significant annual contemporaneous measures or same day intermarket relationship among India and most of the other foreign countries, the contemporaneous feedback statistics also reveals an increasing tendency in the degree of integration among the markets over a period of time, leading to a greater co-movements and therefore higher market efficiency at the international scenario. Except for Sri Lanka and Sweden, there is a significant contemporaneous flow of information among India and 20 other foreign countries. The countries from the same region are found to be more integrated than those from the different regions. As far as the unidirectional feedback measures are concerned, though most of the measures for the whole study period are found to be significant, only few annual measures exhibit statistical significance. Interestingly, India has been found to play a stronger leading role for the countries in the Asian region except for Pakistan, Philippines, and Singapore, during the entire study period. At the same time, USA and other five out of ten European countries have been found to strongly lead the Indian market during the same period. But, unlike the contemporaneous measures, there is no fixed trend (either increasing or decreasing) in the movements of the annual unidirectional feedback measures. Thus it is very difficult to conclude that any specific market consistently leads or follows the other market. As far as the pooled regression results are concerned, out of various macroeconomic factors, only some of them including the time trend are found to be significant in assessing the contemporaneous inter-market relation. At the same time, none of the macroeconomic factors, except the volatility in bi-lateral exchange rate and volatility differential among the two markets, are found to be statistically significant in explaining the unidirectional lead-lag relationship among the markets.

Comparative Advantage and the Gains from Financial Trade: A Reappraisal

Emerging market crises have suggested that a national benefit‐cost assessment of external financial liberalisation could well prove unfavourable. This paper re‐examines the principle of comparative advantage in its application to financial trade to seek guidance on measures that might permit a fuller realisation of the potential benefits involved. Drawing a parallel with Balasubramanyam's work on the gains from FDI and international migration we distinguish between those arising in financial trade from the net transfer of capital, and those deriving from the contemporaneous exchange of financial claims or services of equivalent value. In the first interpretation a country's comparative advantage is manifested by its role in ‘intertemporal’ trade (as a borrower or lender). Our alternative emphasis is on the contractual risk‐return characteristics of the financial claims exchanged. This perspective is applied firstly to portfolio diversification gains arising from further international stock market integration. Secondly, price risk management for developing countries in international primary commodity trade is discussed. Both applications imply the need for significant institutional development but could realise approximately contemporaneous gains reminiscent both of those involved in merchandise trade and in the skills and product (or service) flows that Balasubramanyam has emphasised in relation to FDI and international migration.

International Stock Market Integration and Its Economic Determinants: A Study of Indian and World Equity Markets

Price co-movements and hence inter-market relations on the same day and lead-lag relations across days among India and other foreign countries all over the world, coupled with the possible forces behind the evolution of international stock market integration among India and other countries is studied. Daily closing prices of all the major equity indices from a sample of 23 countries, including India, for a period of 16 years have been used to assess the co-movement of prices internationally. Geweke (1982) Measures of Feedback along with a Polled Time Series analysis are used to explore the possibility of inter-market relations among India and some other foreign countries, and to examine the statistical significance of some important variables on the evolution of such inter-market relationship across the national border of India. Apart from exhibiting a significant contemporaneous or same day inter-market relationship among India and most of the other foreign countries, the contemporaneous feedback measures also reveals that there is an increasing tendency in the degree of integration among the markets over a period of time. As far as the unidirectional feedback measures are concerned, though most of the measures for the whole study period are found to be significant, only few annual measures exhibit statistical significance. Apart from this, unlike the contemporaneous measures, there is no fixed trend (either increasing or decreasing) in the movements of the annual unidirectional feedback measures. The polled regression results reveals that out of various macroeconomic factors, only some of them including the time trend are found to be significant in assessing the forces behind the contemporaneous inter-market relation. But none of the variable, except one, has shown statistical significance in explaining the co-movement of prices beyond one day.

An examination of financial integration for the group of seven (G7) industrialized countries using an I(2) cointegration model

This study investigates financial cointegration of G7 equity markets. The term ‘international stock market integration’ refers to an area of research in financial economics that covers many different aspects of the interrelationships across equity markets. The cointegration of order two model, I(2), that was developed by Johansen is used to specify potential cointegration structure. The empirical validity of this economic model is investigated by employing monthly stock indexes of the Group of Seven (G7) from March 1978 through December 1997 on Morgan Stanley's Capital International (MSCI) indices. This monthly time series data is used to estimate the vector error correction model of order two (VECM(2)). The joint cointegration tests show that (at p<0.05) there is one common I(2) trend and two I(1) trends in the financial equity market returns of G7 countries. Potential explanations of these results and implications for portfolio diversification strategies are discussed.

International Market Linkages between the U.S. and Korea OTC Futures Markets: Information Transmission from NASDAQ100 Index Cash and Futures Markets to KOSDAQ50 Index Cash and Futures Markets

This study tests the international transmission from NASDAQ100 index spot and NASDAQ100 index futures to KOSDAQ50 index spot and KOSDAQ50 index futures markets for the period of Jan. 2001 - Dec. 2002. Based on the time-varying AR(1)-GARCH(1,1)-M models, the results show that the open-to-close returns of the NASDAQ100 index spot and futures have predictive power over both the open-to-close and close-to-open returns of KOSDAQ50 index spot and futures. In particular, the open-to-close returns of both NASDAQ100 index spot and futures have much stronger effect over the close-to-open returns of KOSDAQ50 index spot. We also find that the NASDAQ100 index futures returns have strong predictive power over the KOSDAQ50 index futures returns similar to the results from the NASDAQ100 index spot. In addition, the tests show that the close-to-open returns of the NASDAQ100 index futures, rather than those of NASDAQ100 index spot have stronger information spillover effect over the open-to-close returns of both the KOSDAQ50 index spot and futures. The results also represent that there is co-movement between the KOSDAQ50 index spot and the NASDAQ100 index spot and between the KOSDAQ50 index futures and the NASDAQ100 index futures. These findings support that the market efficiency and the international stock market integration are on the increasing trend in terms of both mean and time varying volatility. Specifically, the results of the information spillover effects between NASDAQ100 index futures market and the KOSDAQ50 index futures market would provide useful information in country diversification and industry diversification. EFA Classification code: 630, 620

Networks and equity market integration: European evidence

Deregulation, globalization, and technological developments have altered the business strategies of stock exchanges around the world. We investigate whether the adoption of network strategies by stock exchanges creates additional value in the provision of trading services. Using unbalanced panel data from all major European exchanges over the period 1996–2000, we examine the consequences of network cooperation on a number of stock market performance measures. We show that adopting a network strategy is associated with higher market capitalization, lower transaction costs, higher growth, and enhanced international stock market integration.

Stock Market Integration and Financial Crises: The Case of Asia

This study examines long-run relationships and short-run dynamic causal linkages among the U.S., Japanese, and ten Asian emerging stock markets, with the particular attention to the 1997-1998 Asian financial crisis. Extending related empirical studies, comparative analyses of pre-crisis, crisis, and post-crisis periods are conducted to comprehensively evaluate how stock market integration is affected by financial crises. In general, the results for the case of Asia show that both long-run cointegration relationships and short-run causal linkages among these markets were strengthened during the crisis and that these markets have generally been more integrated after the crisis than before the crisis. Detailed country-by-country analyses are provided, which yield a variety of new results concerning the roles of individual countries in international stock market integration. An important implication of our findings is that the degree of integration among countries tends to change over time, especially around periods marked by financial crises.

Stock market integration and financial crises: the case of Asia

This study examines long-run relationships and short-run dynamic causal linkages among the US, Japanese, and ten Asian emerging stock markets, with the particular attention to the 1997–1998 Asian financial crisis. Extending related empirical studies, comparative analyses of pre-crisis, crisis, and post-crisis periods are conducted to comprehensively evaluate how stock market integration is affected by financial crises. In general, the results for the case of Asia show that both long-run cointegration relationships and short-run causal linkages among these markets were strengthened during the crisis and that these markets have generally been more integrated after the crisis than before the crisis. Detailed country-by-country analyses are provided, which yield a variety of new results concerning the roles of individual countries in international stock market integration. An important implication of our findings is that the degree of integration among countries tends to change over time, especially around pe...

International Stock Market Integration: Evidence from Nonlinear Cointegration Analysis

This paper employs newly developed techniques of nonlinear cointegration analysis to study international stock market integration. The stock price indexes of Australia, Japan, New Zealand, the United Kingdom and the United States are used in both linear and nonlinear cointegration tests on bivariate and various multivariate models. Much more evidence of market integration emerges from nonlinear cointegration analysis than linear analysis. It appears, therefore, that many of the conclusions reached in prior work that used traditional methodologies need to be reconsidered.

Economic determinants of evolution in international stock market integration

This study investigates how and why different pairs of national equity markets display differing degrees of co-movement over time. We interpret a greater degree of co-movement to reflect greater stock market integration. We hypothesize the extent of stock market integration may depend upon certain macroeconomic variables that characterize and influence the degree of economic integration between two countries. As the degree of economic integration varies over time for a given pair of countries, we may expect the extent of equity market integration to vary systematically. We empirically investigate this hypothesis by employing a two-step procedure to explore first, how the degree of co-movement for a given pair of markets varies over time and second, why this interdependence varies over time. First, we employ daily data for nine national equity markets over 22 yearly samples to estimate annual Geweke [J. Am. Statist. Assoc. 77 (1982) 304–313] measures of feedback for different pairs of markets. For each pair of markets, the time series of 22 annual Geweke measures reveals the evolution in how co-movement in daily returns varies over time. Second, we specify a set of macroeconomic variables that characterize and influence the degree of economic integration for each pair of countries. Finally, we incorporate these variables in a pooled time series regression model across all possible pairs of these nine markets to estimate the influence of macroeconomic determinants on evolution in stock market integration.