The dynamics and drivers of global market integration: Regional and cultural factors matter

XueTing Xiang, Kian-Ping Lim and Sheue-Li Ong

Research in International Business and Finance, 2025, vol. 78, issue C

Abstract: This study investigates the dynamics and drivers of global market integration using two Bayesian approaches that are commonly utilized in empirical growth literature. Applying a Bayesian Dynamic Factor Model to stock index data from 47 exchanges spanning 1995–2020, we find that regional factors play a crucial role in stock return variations, particularly for larger Asian and European markets. This challenges conventional measures of market integration that often overlook regional dynamics. Our time-varying measure of global market integration reveals that emerging markets exhibit unexpectedly higher levels of integration than developed markets when accounting for regional factors. To identify robust drivers of integration, we employ Instrumental Variable Bayesian Model Averaging, which addresses model uncertainty and endogeneity. Culture emerges as the most influential determinant, explaining 82.80 % of the variance in global market integration. These findings underscore the importance of cultural dimensions in shaping market reactions to global factors.

Keywords: Market integration; Global factor; International equity markets; Bayesian econometrics; Cultural finance (search for similar items in EconPapers)
JEL-codes: C11 F36 G15 M14 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:riibaf:v:78:y:2025:i:c:s0275531925002314

DOI: 10.1016/j.ribaf.2025.102975

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