Cointegration of International Stock Market Indices

IMF Working Papers, August 1, 1994

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Cointegration of International Stock Market Indices

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Bibliographic details

• Authors: Ray Yeu-Tien Chou, Victor Ng, Lynn K. Pi
• Published: August 1, 1994
• Series: IMF Working Papers

Summary findings

• Using the multivariate cointegration test of Johansen, the set of six country stock price indices (United States, Canada, the United Kingdom, France, Germany, and Japan) are cointegrated.
• The cointegration results indicate long-run equilibrium relationships among the stock market prices.
• Subsample and subgroup analyses indicate that the cointegration relationships have become stronger over time.
• The observed strengthening of cointegration is consistent with greater stock market integration amid increasing liberalization and globalization of capital markets.

Methodology

• Applied the multivariate cointegration test of Johansen to international stock price indices.
• Examined cointegration properties of international stock market prices across six countries: United States, Canada, United Kingdom, France, Germany, Japan.

Analysis and implications

• Evidence of cointegration implies persistent long-run linkages in international stock prices across the six countries studied.
• Stronger cointegration over time suggests increasing integration of international stock markets during the sample period, consistent with capital market liberalization and globalization.
• Implicitly, increased integration may affect cross-border asset pricing, risk-sharing, and the transmission of shocks across markets.

Subjects and keywords

• Subjects: Asset prices, Financial markets, International capital markets, Prices, Securities markets, Stock markets
• Keywords: Asset prices, augmented term, integrating vector, integration relationship, International capital markets, market integration, North America, price, price series, price variable, Securities markets, short-run price dynamics, stock market, Stock markets, test statistics, WP

IMF Working Papers — Cointegration of International Stock Market Indices, Ray Yeu-Tien Chou, Victor Ng, Lynn K. Pi, August 1, 1994, Working Paper No. 1994/094