International stock market cointegration under the risk-neutral measure
Gabriel Power and
International Review of Financial Analysis, 2016, vol. 47, issue C, 243-255
This paper investigates international cointegration and financial integration among equity market indexes using index option data, providing an ex-ante analysis through investor anticipations. Daily time series of risk-neutral variance, skewness, and kurtosis are constructed for five major indexes for three sub-periods between 2003 and 2013. Fractionally cointegrated VAR models are estimated at the international level, accounting for persistence in risk-neutral moments. Our results show that there exist international equilibria in risk-neutral moments defined by several cointegrating vectors. During the 2007–2009 global crisis period, these equilibria are characterized by an increase in persistence and in the speeds of adjustment. Moreover, for risk-neutral variance and skewness, all markets are included in the equilibria and none are weakly exogenous. Outside the global crisis period, the cointegration relationship is more fragmented, especially for higher-order moments. In particular, crash and tail risks are segmented during the European debt crisis.
Keywords: Financial market cointegration; Financial integration; Option-implied distribution (search for similar items in EconPapers)
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Persistent link: http://EconPapers.repec.org/RePEc:eee:finana:v:47:y:2016:i:c:p:243-255
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