Summary of WP/94/94: “Cointegration of International Stock Market Indices”

Authors of Working Papers are normally staff members of the Fund or consultants, although on occasion outside authors may collaborate with a staff member in writing a paper. The views expressed in the Working Papers or their summaries are, however, those of the authors and should not necessarily be interpreted as representing the views of the Fund. Copies of individual Working Papers and information on subscriptions to the annual series of Working Papers may be obtained from IMF Publication Services, International Monetary Fund, 700 19th Street, Washington, D.C. 20431. Telephone: (202) 623-7430 Telefax: (202) 623-7201 This compilation of summaries of Working Papers released during July-December 1994 is being issued as a part of the Working Paper series. It is designed to provide the reader with an overview of the research work performed by the staff during the period.

Abstract

Authors of Working Papers are normally staff members of the Fund or consultants, although on occasion outside authors may collaborate with a staff member in writing a paper. The views expressed in the Working Papers or their summaries are, however, those of the authors and should not necessarily be interpreted as representing the views of the Fund. Copies of individual Working Papers and information on subscriptions to the annual series of Working Papers may be obtained from IMF Publication Services, International Monetary Fund, 700 19th Street, Washington, D.C. 20431. Telephone: (202) 623-7430 Telefax: (202) 623-7201 This compilation of summaries of Working Papers released during July-December 1994 is being issued as a part of the Working Paper series. It is designed to provide the reader with an overview of the research work performed by the staff during the period.

International capital market development in the past two decades has been marked by a series of policy changes that contribute to the liberalization and globalization of capital markets. These market developments can promote market integration and can change the relationship among equity prices in different countries.

The traditional approach of testing market integration by studying changes in correlations usually cannot provide very precise information in this regard, as correlations are also affected by short-term trading noise. To avoid this problem, this paper studies market integration by inspecting the long-run relationship among international stock market prices. The long-run relationship is given by the cointegration properties of the stock market price series. By studying changes in the cointegration properties of the set of stock price series, it is possible to derive implications on changes in the long-run relationship among the equity markets.

The paper’s analysis employs the multivariate cointegration test of Johansen to test for the existence of long-run relationships among the stock market indices of the United States, the United Kingdom, Japan, France, Germany, and Canada. The result indicates that the set of six country stock price indices are cointegrated, and suggests that there are long-run equilibrium relationships among the stock market prices.

Subsample and subgroup analyses also indicate that the cointegration relationships have become stronger over time. Specifically, there is evidence that the European country stock markets have become more related to the United States and Canadian stock markets. Furthermore, the Japanese stock market has become more integrated with the other stock markets. The strengthening of international stock market integration is consistent with the increasing liberalization and globalization of capital markets.

Working Paper Summaries (WP/94/77 - WP/94/147)
Author: International Monetary Fund