Stock Market Integration Research Articles

EMERGING STOCK MARKET INTEGRATION: EVIDENCE FROM THE PRE- AND POST-FINANCIAL CRISIS OF 2007-2009

We investigate the interdependence between the US and seven emerging economy stock markets in Brazil, China, India, Malaysia, Mexico, Taiwan, and Thailand. Specifically, we examine how the 2007-2009 financial crisis influenced the dynamics of stock market integration between the US and seven emerging countries by analyzing the short-run and long-run effects of the crisis over pre-crisis (January 1995 to November 2007) and post-crisis (July 2009 to December 2018) periods. The results of Johansen co-integration tests confirm presence of co-integration in both sample periods. Short-run Vector Error Correction Model (VECM) results indicate a significant influence of the US market on the seven markets except for Brazilian and Chinese markets in the pre-crisis period. The pre-crisis long-run results demonstrate significant cointegrating relationships between the US market and the Indian, Malaysian, Mexican, and Thai markets. Only the Mexican market had the same cointegrating relationship with the US market in both periods. The insignificant pre-crisis period cointegrating relationships between the US and Brazilian, Chinese, and Taiwanese markets become significant post-crisis. Although the Indian stock market was cointegrated with the US market in the pre-crisis period, the relationship is insignificant post-crisis. Overall, our findings confirm that the US and seven emerging economy equity markets exhibit some degree of short-run and long-run cointegration. We also find that a negative shock such as a financial crisis may significantly change co-movements among the stock markets. We contribute to the existing literature on financial market integration by examining recent data around the global financial crisis.

Economic integration and stock market linkages: evidence from South Africa and BRIC

PurposeThis study examines the impact of regional economic integration (REI) on stock market linkages in the BRICS (Brazil, Russia, India, China and South Africa) economic bloc. In this type of study, the BRICS framework is an appealing empirical case, given its uncommon characteristics. For example, BRICS member states come from remote geographic locations (Africa, Asia, Europe and South America) and have contrasting socioeconomic profiles.Design/methodology/approachAn empirical design is framed from the perspective of bilateral trade between South Africa and BRIC. The author accepts trade intensity as a proxy of regional economic integration and then examines the resulting effect on the stock market co-movement within BRIC. The study applies a two-step econometric procedure of the BEKK-MGARCH and panel data models.FindingsOverall, bilateral trade, as a proxy of economic inwctegration, is associated with an increase in stock market integration. This positive relationship is particularly observed during episodes of surplus trade, and more interestingly, was initiated three years after BRICS’ existence and continues to grow at an increasing rate.Practical implicationsThe study outcome should benefit international trade practitioners and global investors interested in portfolio diversification or concerned with risk spillovers.Originality/valueFirst, notwithstanding South Africa's significant economic presence in the African continent, to the best of the author’s knowledge, this is the first study to empirically evaluate the BRICS economic integration on their stock market linkages from the perspective of South Africa. The value of this contribution is that further work may investigate the bidirectional spillover impact conveyed by South Africa's trade interactions within the juxtaposition of Africa and BRICS economies. Second, given that research on REI and stock market integration has historically concentrated on mature regional blocs of Europe, Asia, South and North America, the current study advances knowledge while correcting the prevailing literature imbalance.

Cointegration and causality relationship of Indian stock market with selected world markets

Background: The purpose of this study is to explore the trends and causes of established and emerging nations’ stock market integration with India. The National Stock Exchange (NSE) indices act as a counterweight to international market indices. This study investigates the sustained interest of foreign investors in the Indian stock market in the wake of capital market reforms, as well as whether it moves in tandem with other markets in Asia and the United States. Methods: Our study examined the possibility of cross-country cointegration between the largest economies and indices around the world using multiple financial econometric models, such as Augmented Dickey-Fuller, Unit Root, Correlation, and Johansen Cointegration. Results: The findings of this study significantly support the notion that Indian and international financial markets are highly integrated. Vector error correction model indicates that the Indian market (NSE) is highly cointegrated with the US market (National Association of Securities Dealers Automated Quotations) and increased volatility signifies global contagion. Conclusion: A cursory examination of the data reveals distinct investment and portfolio diversification options for global investors. This could assist regulators in formulating more effective rules regarding price discovery processes.

Novel evidence from APEC countries on stock market integration and volatility spillover: A Diebold and Yilmaz approach

Novel evidence from APEC countries on stock market integration and volatility spillover: A Diebold and Yilmaz approach

Cointegration and causality relationship of Indian stock market with selected world markets

Background: The purpose of this study is to explore the trends and causes of established and emerging nations' stock market integration with India. The National Stock Exchange (NSE) indices act as a counterweight to international market indices. This study investigates the sustained interest of foreign investors in the Indian stock market in the wake of capital market reforms, as well as whether it moves in tandem with other markets in Asia and the United States. Methods: Our study examined the possibility of cross-country cointegration between the largest economies and indices around the world using multiple financial econometric models, such as Augmented Dickey-Fuller, Unit Root, Correlation, and Johansen Cointegration. Results: The findings of this study significantly support the notion that Indian and international financial markets are highly integrated. Vector error correction model indicates that the Indian market (NSE) is highly cointegrated with the US market (National Association of Securities Dealers Automated Quotations) and increased volatility signifies global contagion. Conclusion: A cursory examination of the data reveals distinct investment and portfolio diversification options for global investors. This could assist regulators in formulating more effective rules regarding price discovery processes.

Network structure and risk-adjusted return approach to stock indices integration: A study on Asia-Pacific countries

The study attempts to examine the stock market integration for Asia-Pacific countries using networks and forms Risk Adjusted Differential Return (RADR) and Benchmark Indices Network (BIN) indices. The RADR index is higher during the Global Financial Crisis (GFC), indicating a higher level of integration. The inter-country network structure is designed where network parameters are capable of explaining stock market integration. Network parameters are higher during the GFC and are used to form a network index - BIN. This study concludes BIN to be a better measure than RADR, as network parameters are independent of differential index return.

Genetic distance and stock market integration

This article explores the role of long-run cultural barriers, captured by genetic distance, in driving differences in stock market integration. The main hypothesis is that genetic distance rises barriers to cross-border dissemination of global market-wide information, leading to greater disparities in the integration of local stock markets. Using panel data from 44 countries for the period 2004–2021, the results show that low (high) levels of genetic distance are associated with high (low) stock market integration. Further evidence suggests that this effect can be mitigated in the local markets by improving the risk profile and quality of institutions, financial openness, and the development of communication systems.

Cointegration of Asian Developed and Frontier Stock Markets: An investigation of Diversification Opportunities

This study examines the cointegration relationship of the Colombo Stock Exchange (CSE) with developed Asian markets (Hong Kong, Japan, Singapore). The main objective of the study is to identify potential diversification benefits that exist in Sri Lankan stock market. The stock market indices are Hang Seng Index (HSI), Nikkei 225(N225), Straits Times Index (STI) and All Share Price Index (ASPI). Daily closing prices of stock market indices were selected for the period of 2013- 2019. The main theoretical base forthe stock market integration was the Law of One Price. The Autoregressive-Distributed Lag (ARDL) bound test used toanalyze data, revealed an insignificant cointegration relationship between CSE and developed stock markets. The ASPI has statistically significant short-run relationships with the STI. HSI and N225 did not provide any evidence of a long-run relationship with the ASPI. A negative insignificant correlation between ASPI and HSI indicates a good combination to have a well-balancedportfolio gain both long and short-run diversification benefits. In conclusion, the non-existence of cointegration among the above stock markets provides opportunities for international diversification of portfolios and possibilities for risk hedging.
 Keywords: Cointegration, Frontier and Developed, Stock Markets, Portfolio Diversification

Empirical evidence of the financial development and economic growth nexus in sub-Saharan Africa (1995–2022): an index approach

PurposeThis research empirically investigates the evidence of the financial development and economic growth nexus in sub-Saharan Africa from 1995 to 2022.Design/methodology/approachA series of preliminary tests are conducted before using the two-stage estimated generalized least squares and robust least squares methods for the analysis. Two indices are constructed to measure financial development: one for the banking sector indicators and another for the market-based indicators (Ustarz and Fanta, 2021).FindingsThe results indicate that the banking sector index significantly impacts the gross domestic product (GDP) per capita positively. The market sector index has a negatively significant effect on the GDP per capita. Government expenditure has a positive impact on the GDP per capita.Research limitations/implicationsPolicymakers in sub-Saharan Africa should improve and implement finance–growth inclusive strategies that promote financial reforms and development to efficiently impact all population sectors. Policymakers should take stringent measures to ensure that the banking sector's development is sustainable to lead economic growth. The governments should strategize and promote capital market development using favorable listing rules for companies in the stock markets. Global stock market integration should be encouraged to diversify risks, increase public awareness, raise investors' confidence level and reduce stock market impediments like high taxes and regulatory barriers.Originality/valuePrevious study findings on the financial development and economic growth nexus are inconclusive and debatable. This study employs the financial development index approach.

Measuring stock market integration during the Gold Standard

AbstractThis paper uses a broad geographical sample of economies to study stock market integration during the classical Gold Standard. It is novel in estimating a common or “global” component of stock market returns across all countries in the sample and studying how individual markets co-move with this. Variations in the integration of individual exchanges often appear related to large domestic financial and political crises as idiosyncratic shocks were more common than they are today. The results suggest that although overall integration rose during this period, it was low compared to more recent data. The results are robust to alternative formulations of the global component and alternative measures of returns.

Cross-border equity flows and information transmission: Evidence from Chinese stock markets

This paper examines the effects of bi-directional cross-border equity flows on stock returns, volatility and valuation differential using the unique setting of Shanghai – Hong Kong Stock Connect program (Stock-Connect) in China. Via Stock-Connect, international investors from Hong Kong (mainland China) can trade qualified stocks listed in Shanghai (Hong Kong). We find that southbound (northbound) investors’ net purchases positively predict returns of connected Hong Kong (Shanghai) stocks. However, southbound and northbound equity flows have opposite effects on stock volatility: there is a positive (negative) relationship between lagged southbound (northbound) flow volume and volatility of connected stocks in Hong Kong (Shanghai). A higher price premium of A shares over H shares leads to an increase in Southbound net purchase, which in turn results in a lower AH share price premium. Our study shows that stock market integration facilitates information sharing and narrow valuation differential across previously segmented markets.

Reporting quality, stock market integration, and investment efficiency in Latin America

This study examines the impact of the Latin American Integrated Market (MILA for its Spanish acronym) on investment efficiency from 2003 to 2020. Our research suggests that MILA affects the efficiency of investment decisions by reducing information asymmetry and the agency problem. We present compelling empirical evidence that the impact of MILA on enhancing investment efficiency is especially pronounced in the over-investment problem. Furthermore, the mediation analysis reveals that firms listed on MILA stock exchanges have increased the efficiency of their investments, a result attributable partly to enhanced financial reporting quality. We employ difference-in-difference analysis to address the possibility of endogeneity. Our findings are validated by the fact that, compared with control firms, treatment firms improve their investment efficiency and mitigate the over-investment problem, thereby validating our findings.

Another history of global financial markets: Local stock market integration since 1913 from a network perspective

AbstractWe examine local and global equity market integration since 1900 using network methods. The analysis uncovers a new stylised fact about equity market integration over the past 120 years. Local equity market integration generally increases over the entire sample period. This finding is at odds with much of the existing literature that describes long‐run market integration as following a U‐shape pattern. Global stock market integration peaks in 1913 followed by disintegration during the Great Depression and Bretton Woods periods. Then it rebounds and achieves the highest level of integration during the recent period of globalisation that began in the early 1970s. We argue that this U‐shape pattern is the by‐product of the interaction of the network effects of the monotonic decrease in local distances (decrease in information costs, accelerated in the past decades) and network connectivity (which varies inversely with the control over international financial transactions).

Stock market integration and volatility spillovers: new evidence from Asia–Pacific and European markets

PurposeThis work investigates the volatility spillovers across stock markets and the nature of such spillovers through different periods of crises and tranquility.Design/methodology/approachUsing daily stock return volatility data from June 2003 to June 2021, the generalized forecast error variance decomposition method (based on Diebold and Yilmaz, 2012 approach) is employed to measure the degree of volatility spillovers/connectedness among stock markets of 24 Asia–Pacific and 12 European Union (EU) economies.FindingsThe empirical results from static analysis suggested that about 28.1% (63.7%) of forecast error variance in return volatility for Asia–Pacific (EU) markets is due to spillovers. The evidence from dynamic analysis suggested that during mid of the global financial crisis, European debt crisis (EDC) and Covid-19, the gross volatility spillovers for Asia–Pacific (EU) was around 67% (80%), 65% (80%) and 73% (67%), respectively. The degree of net volatility transmission from Singapore (Denmark) to other Asia–Pacific (EU) markets was found to be highest.Practical implicationsThe findings have crucial implications for the investors and portfolio managers in assessment of risk and optimum allocation of assets and investment decisions.Originality/valueThis study adds to the literature on risk management by systematically examining the impact of global financial crises, EDC and Covid-19 on the market interactions by capturing the magnitude, duration and pattern of the shock-specific market volatilities for a large sample of Asian and European markets using recent and large data set.

Interdependency between Indian and US market indices: A granger causality approach

The Granger causality model is used in the current study to analyze the short-run cause–effect relationship between two stock market indices between 2001 and 2021 using time series data of the daily closing prices of the BSE Sensex and S and P 500 indices listed in the Indian and US stock markets, respectively. The Granger causality model and the augmented Dickey–Fuller test for data stationarity were used in the study to examine the short-term causal link between two market indices during the time period. The outcomes demonstrated the connection between the Indian and US stock markets. The findings imply that both markets have a dynamic, bidirectional relationship. This study provides the investor’s essential inputs for investment decision-making and portfolio diversification. In the current era of globalization, the study is crucial because investors and fund managers now place a high priority on stock market integration. Through fund diversification across equity markets, this study subsequently makes it easier to reduce portfolio risk by providing useful insights on diversification strategies across the stock markets.

Stock market integration in emerging markets in the spectre of the global financial crisis

Stock market integration in emerging markets in the spectre of the global financial crisis

Особливості капіталізації ринку цінних паперів в Україні

The purpose of the article is a theoretical and methodological substantiation together with elaboration of recommendations for increasing the capitalization of the domestic securities market. The article is concerned with studying the level of development of the securities market and the directions of increasing its capitalization, which will provide favorable conditions for the formation of an appropriate level of economic development of the country. Emphasis is placed on the fact that the concept of «capitalization» is interpreted as a complex dynamic process of forming prospects for the development of the Ukrainian economy, which varies depending on the outlined tasks. It is identified that the capitalization of the stock market testifies to the intensity of the national economy and reflects the dynamics of changes in its various industries. The development tendency of the world stock market is analyzed and the experience of world leading companies with the highest level of market capitalization is adapted. The volumes and structure of trading on operators of organized capital markets by type of market are considered and the main obstacles to the further development of the Ukrainian stock market are substantiated. The need to integrate the domestic securities market into the world stock market is accentuated. Based on the carried out correlation analysis, it is found that the closest relationship between the volume of trading in shares on the Ukrainian securities market and the aforementioned factors occurs with the total trading volume in the securities market, namely: the more transactions are carried out on the market, the higher the volume of transactions with shares. It is noted that the domestic securities market in order to improve the efficiency of further functioning requires: improvement of the legislative framework; increasing the level of motivation; minimization of financial risks; improving infrastructure development, etc. Further research will be aimed at developing promising directions for the integration of the domestic stock market into the global financial space.

Eurozone Stock Market Integration and the Base-Bank Money Divergence

Eurozone Stock Market Integration and the Base-Bank Money Divergence

Cointegration and causality relationship of Indian stock market with selected world markets

Background: The purpose of this study is to explore the trends and causes of established and emerging nations' stock market integration with India. The National Stock Exchange (NSE) indices act as a counterweight to international market indices. This study investigates the sustained interest of foreign investors in the Indian stock market in the wake of capital market reforms, as well as whether it moves in tandem with other markets in Asia and the United States. Methods: Our study examined the possibility of cross-country cointegration between the largest economies and indices around the world using multiple financial econometric models, such as Augmented Dickey-Fuller, Unit Root, Correlation, and Johansen Cointegration. Results: The findings of this study significantly support the notion that Indian and international financial markets are highly integrated. Vector error correction model indicates that the Indian market (NSE) is highly cointegrated with the US market (National Association of Securities Dealers Automated Quotations) and increased volatility signifies global contagion. Conclusion: A cursory examination of the data reveals distinct investment and portfolio diversification options for global investors. This could assist regulators in formulating more effective rules regarding price discovery processes.

A study on the nonlinear dynamics of ASEAN financial integration

PurposeThis study examines the co-integration relationships between Association of Southeast Nations (ASEAN) stock indices as a way to assess the feasibility of policy initiatives to strengthen market integration in ASEAN and identify implications for portfolio investors.Design/methodology/approach The authors employ threshold co-integration tests and a non-linear autoregressive distributed lag (NARDL) model to study the asymmetric dynamics of ASEAN equity markets. The study’s data cover the 2009–2022 period for seven member states: Cambodia, Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam.FindingsThe authors find evidence supporting co-integration relationships; adjustment toward equilibrium is asymmetric in the short run and symmetric in the long run for these countries. While co-movement in ASEAN equity markets seems encouraging for initiatives seeking to foster financial integration in regional economies, the benefits for international portfolio diversification appear to be neutralized.Originality/valueThe issue of stock market integration is important among policymakers, investors and academics. This study examines the level of stock market integration in ASEAN during the 2009–2022 period. For this purpose, advanced co-integration techniques are applied to different frequencies of data (daily, weekly and monthly) for comparison and completeness. The empirical analysis of this study is conducted using the Enders and Siklos (2001) co-integration and threshold adjustment procedure. This advanced co-integration technique is superior compared to other co-integration techniques by permitting asymmetry in the adjustment toward equilibrium.