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How close a relationship does a capital market have with other markets? A reexamination based on the equal variance test

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  • Yang, Lixiong
  • Lee, Chingnun
  • Shie, Fu Shuen

Abstract

The cointegration test cannot discriminate closer relationships from cointegrating relationships. In most applications, we must assess the degrees of cointegrating relationships, for example, to examine the comovement between international stock markets using the cointegration methodology. Lee et al. (2012) introduced a variance test of cointegration equilibrium errors to measure the similarity of these relationships. However, the key assumption of cross-sectional independence between a panel of two country-pair squared cointegrating equilibrium errors in their model is not desirable. The appearance of cross-sectional dependence of individual (stock) markets in a panel is a common existence. The current paper shows that the consideration of cross-sectional dependence and the method of estimating long-run variance are important. Our results, which extend the cross-sectional dependence of some Asian stock markets during the Asian financial crisis (1997–1998) documented by Lee et al. (2012), indicate that the similarity of background and business cooperation (or trading activities) are all crucial factors for determining the price patterns by the “equal variance test” proposed in this paper. The analysis of the 2007–2009 global financial crisis is included to confirm the robustness of the results.

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  • Yang, Lixiong & Lee, Chingnun & Shie, Fu Shuen, 2014. "How close a relationship does a capital market have with other markets? A reexamination based on the equal variance test," Pacific-Basin Finance Journal, Elsevier, vol. 26(C), pages 198-226.
  • Handle: RePEc:eee:pacfin:v:26:y:2014:i:c:p:198-226
    DOI: 10.1016/j.pacfin.2013.12.007
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    1. repec:eee:joecas:v:12:y:2015:i:2:p:153-161 is not listed on IDEAS

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    Keywords

    Asian financial crisis; Cointegration; International stock markets; The 2007–2009 global financial crisis; The equal variance test;

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • F59 - International Economics - - International Relations, National Security, and International Political Economy - - - Other
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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