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Testing for international equity market integration using regime switching cointegration techniques

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  • Andrew Davies

Abstract

Using MSCI total return index data, this paper analyses the degree of international equity market integration using modern cointegration techniques. The existence of a long run equilibrium across equity markets is important since it implies a violation of weak form market efficiency. Short run deviations away from equilibrium can be expected to reverse, thereby implying a degree of market predictability. This analysis adds to the existing literature by considering a regime switching cointegration relationship that allows for multiple structural breaks over time. The analysis provides scant evidence in favour of market integration with a single regime treatment. There is, however, significant evidence to support a two‐regime Markov switching long‐run equilibrium relationship that has evolved since the 1970s.

Suggested Citation

  • Andrew Davies, 2006. "Testing for international equity market integration using regime switching cointegration techniques," Review of Financial Economics, John Wiley & Sons, vol. 15(4), pages 305-321.
    • Handle: RePEc:wly:revfec:v:15:y:2006:i:4:p:305-321
    DOI: 10.1016/j.rfe.2005.11.002
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