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Short-run disequilibrium adjustment and long-run equilibrium in the international stock markets: A network-based approach

Yanhua Chen, Youwei Li, Athanasios Pantelous and Eugene Stanley

MPRA Paper from University Library of Munich, Germany

Abstract: In this paper, we propose a network-based analytical framework that exploits cointegration and the error correction model to systematically investigate the directional interconnectedness of the short-run disequilibrium adjustment towards long-run equilibrium affecting the international stock market during the period of 5 January 2007 to 30 June 2017. Under this setting, we investigate whether and how the cross-border directional interconnectedness within the world's 23 developed and 23 emerging stock markets altered during the 2007-2009 Global Financial Crisis, 2010-2012 European Sovereign Debt Crisis, and the entire period of 2007-2017. The main results indicate that changes in directional interconnectedness within stock markets worldwide did occur under the impact of the recent financial crises. The extent of the short-run disequilibrium adjustment towards long-run equilibrium for individual stock markets is not homogeneous over different time scales. The derived networks of stock markets interconnectedness allow us to visually characterize how specific stock markets from different regions form interconnected groups when exhibiting similar behaviours, which none the less provides significant information for strategic portfolio and risk management.

Keywords: International Stock Markets; Cointegration; Error Correction Model; Complex Network Theory; Financial Crisis (search for similar items in EconPapers)
JEL-codes: C12 G01 G15 (search for similar items in EconPapers)
Date: 2020-05-29
New Economics Papers: this item is included in nep-net and nep-rmg
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