Testing for Convergence in Stock Markets: A Non-Linear Factor Approach
AbstractThis paper applies the Phillips and Sul (2007) method to test for convergence in stock returns to an extensive dataset including monthly stock price indices for five EU countries (Germany, France, the Netherlands, Ireland and the UK) as well as the US over the period 1973-2008. We carry out the analysis on both sectors and individual industries within sectors. As a first step, we use the Stock and Watson (1998) procedure to filter the data in order to extract the long-run component of the series; then, following Phillips and Sul (2007), we estimate the relative transition parameters. In the case of sectoral indices we find convergence in the middle of the sample period, followed by divergence, and detect four (two large and two small) clusters. The analysis at a disaggregate, industry level again points to convergence in the middle of the sample, and subsequent divergence, but a much larger number of clusters is now found. Splitting the cross-section into two subgroups including Euro area countries, the UK and the US respectively, provides evidence of a global convergence/divergence process not obviously influenced by EU policies.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2845.
Date of creation: 2009
Date of revision:
stock market; financial integration; European Monetary Union convergence; factor model;
Find related papers by JEL classification:
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models
- C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Longitudinal Data; Spatial Time Series
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Campa, Jose Manuel & Fernandes, Nuno, 2006.
"Sources of gains from international portfolio diversification,"
Journal of Empirical Finance,
Elsevier, vol. 13(4-5), pages 417-443, October.
- Campa, Jose M. & Fernandes, Nuno, 2004. "Sources of gains from international portfolio diversification," IESE Research Papers D/559, IESE Business School.
- Campa, José Manuel & Fernandes, Nuno, 2004. "Sources of Gains from International Portfolio Diversification," CEPR Discussion Papers 4390, C.E.P.R. Discussion Papers.
- Barro, Robert J & Sala-i-Martin, Xavier, 1992.
Journal of Political Economy,
University of Chicago Press, vol. 100(2), pages 223-51, April.
- Barro, Robert J. & Sala-i-Martin, Xavier, 1992. "Convergence," Scholarly Articles 3451299, Harvard University Department of Economics.
- Barro, R.J. & Sala-I-Martin, X., 1991. "Convergence," Papers 645, Yale - Economic Growth Center.
- Barro, R.J. & Sala-I-Martin, X., 1991. "Convergence Across States and Regions," Papers 629, Yale - Economic Growth Center.
- Durlauf,S.N. & Quah,D.T., 1998.
"The new empirics of economic growth,"
3, Wisconsin Madison - Social Systems.
- Steven N. Durlauf & Danny T. Quah, 1998. "The New Empirics of Economic Growth," Working Papers 98-01-012, Santa Fe Institute.
- S Durlauf & Danny Quah, 1998. "The New Empirics of Economic Growth," CEP Discussion Papers dp0384, Centre for Economic Performance, LSE.
- Steven N. Durlauf & Danny T. Quah, 1998. "The New Empirics of Economic Growth," NBER Working Papers 6422, National Bureau of Economic Research, Inc.
- Robin Brooks & Marco Del Negro, 2002.
"The rise in comovement across national stock markets: market integration or IT bubble?,"
2002-17a, Federal Reserve Bank of Atlanta.
- Brooks, Robin & Del Negro, Marco, 2004. "The rise in comovement across national stock markets: market integration or IT bubble?," Journal of Empirical Finance, Elsevier, vol. 11(5), pages 659-680, December.
- William N. Goetzmann & Lingfeng Li & K. Geert Rouwenhorst, 2005.
"Long-Term Global Market Correlations,"
The Journal of Business,
University of Chicago Press, vol. 78(1), pages 1-38, January.
- William Goetzmann & Lingfeng Li & K. Rouwenhorst, 2001. "Long-Term Global Market Correlations," Yale School of Management Working Papers ysm237, Yale School of Management, revised 01 Jan 2008.
- William N. Goetzmann & Lingfeng Li & K. Geert Rouwenhorst, 2001. "Long-Term Global Market Correlations," NBER Working Papers 8612, National Bureau of Economic Research, Inc.
- William N.Goetzmann & Lingfeng Li & K.Geert Rouwenhorst, 2003. "Long-Term Global Market Correlations," DNB Staff Reports (discontinued) 98, Netherlands Central Bank.
- Jushan Bai, 2003. "Inferential Theory for Factor Models of Large Dimensions," Econometrica, Econometric Society, vol. 71(1), pages 135-171, January.
- Bernard, A.B. & Durlauf, S.N., 1994.
"Interpreting Tests of the Convergence Hypothesis,"
9401r, Wisconsin Madison - Social Systems.
- Robert J. Barro & Xavier Sala-i-Martin, 1991.
"Convergence across States and Regions,"
Brookings Papers on Economic Activity,
Economic Studies Program, The Brookings Institution, vol. 22(1), pages 107-182.
- Chen, Zhiwu & Knez, Peter J, 1995. "Measurement of Market Integration and Arbitrage," Review of Financial Studies, Society for Financial Studies, vol. 8(2), pages 287-325.
- Peter C. B. Phillips & Donggyu Sul, 2007.
"Transition Modeling and Econometric Convergence Tests,"
Econometric Society, vol. 75(6), pages 1771-1855, November.
- Peter C.B. Phillips & Donggyu Sul, 2007. "Transition Modeling and Econometric Convergence Tests," Cowles Foundation Discussion Papers 1595, Cowles Foundation for Research in Economics, Yale University.
- Ulrich Fritsche & Vladimir Kuzin, 2008. "Analysing Convergence in Europe Using a Non-linear Single Factor Model," Macroeconomics and Finance Series 200802, Hamburg University, Department Wirtschaft und Politik.
- Kpate ADJAOUTÉ, & Jean-Pierre DANTHINE, 2000.
"EMU and Portfolio Diversification Opportunities,"
FAME Research Paper Series
rp31, International Center for Financial Asset Management and Engineering.
- Bart Hobijn & Philip Hans Franses, 2000. "Asymptotically perfect and relative convergence of productivity," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 15(1), pages 59-81.
- Heston, Steven L. & Rouwenhorst, K. Geert, 1994. "Does industrial structure explain the benefits of international diversification?," Journal of Financial Economics, Elsevier, vol. 36(1), pages 3-27, August.
- Bekaert, Geert & Harvey, Campbell R, 1995.
" Time-Varying World Market Integration,"
Journal of Finance,
American Finance Association, vol. 50(2), pages 403-44, June.
- Kpate ADJAOUTÉ & Jean-Pierre DANTHINE, 2003. "European Financial Integration and Equity Returns: A Theory-Based Assessment," FAME Research Paper Series rp84, International Center for Financial Asset Management and Engineering.
- Hardouvelis, Gikas A. & Malliaropulos, Dimitrios & Priestley, Richard, 2007. "The impact of EMU on the equity cost of capital," Journal of International Money and Finance, Elsevier, vol. 26(2), pages 305-327, March.
- Nazrul Islam, 2003. "What have We Learnt from the Convergence Debate?," Journal of Economic Surveys, Wiley Blackwell, vol. 17(3), pages 309-362, 07.
- Nicholas Apergis & Christina Christou & James Payne, 2011. "Political and Institutional Factors in the Convergence of International Equity Markets: Evidence from the Club Convergence and Clustering Procedure," Atlantic Economic Journal, International Atlantic Economic Society, vol. 39(1), pages 7-18, March.
- Rughoo, Aarti & Sarantis, Nicholas, 2012. "Integration in European retail banking: Evidence from savings and lending rates to non-financial corporations," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(5), pages 1307-1327.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Julio Saavedra).
If references are entirely missing, you can add them using this form.