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A gravity analysis of international stock market linkages

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  • Terence Tai-Leung Chong
  • Wing-Keung Wong
  • Juan Zhang

Abstract

The last decade has witnessed a marked improvement in information technology. Such an improvement has reduced the information cost for market participants. Thus, whether the influence of geographic factors on international financial linkage is still significant nowadays is an important question yet to be addressed. This article develops a gravity model of international financial linkages. Using the panel data of bilateral cross-country stock market correlations of 23 countries, it is found that the correlations are negatively associated with the Great Circular Distance (GCD) between the financial centres of these countries and positively associated with the duration of overlapping trading hours among stock exchanges and the colonial links between countries. However, whether the countries share a common border or language does not affect the stock market correlations.

Suggested Citation

  • Terence Tai-Leung Chong & Wing-Keung Wong & Juan Zhang, 2011. "A gravity analysis of international stock market linkages," Applied Economics Letters, Taylor & Francis Journals, vol. 18(14), pages 1315-1319.
    • Handle: RePEc:taf:apeclt:v:18:y:2011:i:14:p:1315-1319
    DOI: 10.1080/13504851.2010.537614
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    Cited by:

    1. He, Hongbo & Chen, Shou & Yao, Shujie & Ou, Jinghua, 2014. "Financial liberalisation and international market interdependence: Evidence from China’s stock market in the post-WTO accession period," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 33(C), pages 434-444.
    2. Guo, Nian-zhi & Tu, Anthony H., 2021. "Stock market synchronization and institutional distance," Finance Research Letters, Elsevier, vol. 42(C).
    3. Chong, Oiping & Bany- Ariffin, A.N. & Matemilola, Bolaji Tunde & McGowan, C.B., 2020. "Can China’s cross-sectional dispersion of stock returns influence the herding behaviour of traders in other local markets and China’s trading partners?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 65(C).
    4. Seema Narayan, 2019. "The Influence of Domestic and Foreign Shocks on Portfolio Diversification Gains and the Associated Risks," JRFM, MDPI, vol. 12(4), pages 1-26, October.
    5. Bonga-Bonga, Lumengo & Manguzvane, Mathias Mandla, 2023. "Stock market correlation and geographical distance: does the degree of economic integration matter?," MPRA Paper 116476, University Library of Munich, Germany.

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