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Globalization and long-run co-movements in the stock market for the G7: an application of VECM under structural breaks

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  • Rui Menezes
  • Andreia Dioniso
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    Abstract

    This paper analyzes the process of long-run co-movements and stock market globalization on the basis of cointegration tests and vector error correction (VEC) models. The cointegration tests used here allow for structural breaks to be explicitly modeled and breakpoints to be computed on a relative-time basis. The data used in our empirical analysis were drawn from Datastream and comprise the natural logarithms of relative stock market indexes since 1973 for the G7 countries. The main results point to the conclusion that significant causal cointegration effects occur in this context and that there is a long-run equilibrium relationship that governs the worldwide process of market integration. Globalization, however, is a complex adjustment process and in many cases there is only evidence of weak market integration which means that non-proportional price transmission occurs in the market along with proportional changes. The worldwide markets, as expected, appear to be driven in general by the US stock market.

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    File URL: http://arxiv.org/pdf/1101.4093
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    Paper provided by arXiv.org in its series Papers with number 1101.4093.

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    Date of creation: Jan 2011
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    Handle: RePEc:arx:papers:1101.4093

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