Country and Industry Convergence of Equity Markets: International Evidence from Club Convergence and Clustering

This study employs the panel convergence methodology developed by Phillips and Sul (2007) to explore the convergence dynamics of international equity markets. The analysis considers both country and industry effects. While traditional portfolio management strategies usually follow a top-down procedure, assuming that country-level effects drive financial aggregates, e.g. stock returns, our empirical results suggest that the equity markets of 35 of the 42 counties in our sample do form a unified convergence club. The empirical findings also show more numerous stock-price convergence clubs in certain industries. That is, industry factors play a more important role in explaining the actual divergence in stock prices than does the stock market itself. Conversely, the volatility of stock prices exhibits much more evidence of convergence than stock prices. These findings should assist portfolio managers in the design and implementation of appropriate portfolio management strategies. Regulatory authorities also can benefit in the design of financial regulation.