INTEGRATION OF GLOBAL CAPITAL MARKETS: AN EMPIRICAL EXPLORATION

Malay Bhattacharyya () and Ashok Banerjee ()
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Malay Bhattacharyya: Indian Institute of Management, Lucknow, India 226013, India
Ashok Banerjee: Indian Institute of Management, Lucknow, India 226013, India

International Journal of Theoretical and Applied Finance (IJTAF), 2004, vol. 07, issue 04, 385-405

Abstract: It is generally argued that with lifting of barriers to the flow of capital across countries by respective governments, the capital markets have come closer and are now more integrated. This paper examines the existence (or absence) of integration among stock indices of 11 developed and emerging stock markets from three continents: Asia, Europe and America. Using synchronous weekly closing index values from November, 1990 through December, 2001, the study found that all the 11 stock markets are cointegrated. The cointegration analysis was carried out using an error correction vector autoregression (VECM) model. The study goes further to test whether there are any causal relationships among the indices and has used a hitherto empirically untested methodology to explore the causal relationships. Results show that capital market indices from European countries and the USA are not Granger caused by any index. On the other hand, causality effects are much pronounced in Asian capital markets. The capital market in Hong Kong "leads" the other markets in Asia. This learning would help fund managers in managing their exposure in Asian capital markets. The regulators may use the causality results to identify the markets driving movements in a country's capital market and take corrective measures.

Keywords: Global capital markets; cointegration; Granger causality (search for similar items in EconPapers)
Date: 2004
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Citations: View citations in EconPapers (3)

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DOI: 10.1142/S0219024904002529

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