A note on cointegration of international stock market indices

Thomas Dimpfl

International Review of Financial Analysis, 2014, vol. 33, issue C, 10-16

Abstract: Cointegration is frequently used to assess the degree of interdependence of financial markets. We show that if a stock's price follows a stock specific random walk, market indices cannot be cointegrated. Indices are a mere combination of n different random walks which itself is non-stationary by construction. We substantiate the theoretical propositions using a sample of 28 stock indices as well as a simulation study. In the latter we simulate stock prices, construct indices and test whether these indices are cointegrated. We show that while heteroscedasticity misleads cointegration tests, it is not sufficient to explain the high correlation between stock market index returns. A common random walk component and correlated price innovations are necessary to reproduce this feature.

Keywords: Cointegration; Stock market index; Random walk model; International financial markets (search for similar items in EconPapers)
JEL-codes: C32 G15 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1057521913000859
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:33:y:2014:i:c:p:10-16

DOI: 10.1016/j.irfa.2013.07.005

Access Statistics for this article

International Review of Financial Analysis is currently edited by B.M. Lucey

More articles in International Review of Financial Analysis from Elsevier
Bibliographic data for series maintained by Catherine Liu ().