Globalization and long-run co-movements in the stock market for the G7: an application of VECM under structural breaks

TL;DR

This study investigates long-term co-movements and globalization effects in G7 stock markets using cointegration tests and VECM models that account for structural breaks, revealing complex integration patterns and US market influence.

Contribution

It introduces a cointegration analysis with structural breaks to examine long-run relationships and globalization effects in G7 stock markets, highlighting weak integration and US market dominance.

Findings

Significant causal cointegration effects among G7 markets.

Evidence of long-run equilibrium relationships in stock markets.

Globalization involves complex, often weak, market integration.

Abstract

This paper analyzes the process of long-run co-movements and stock market globalization on the basis of cointegration tests and vector error correction (VEC) models. The cointegration tests used here allow for structural breaks to be explicitly modeled and breakpoints to be computed on a relative-time basis. The data used in our empirical analysis were drawn from Datastream and comprise the natural logarithms of relative stock market indexes since 1973 for the G7 countries. The main results point to the conclusion that significant causal cointegration effects occur in this context and that there is a long-run equilibrium relationship that governs the worldwide process of market integration. Globalization, however, is a complex adjustment process and in many cases there is only evidence of weak market integration which means that non-proportional price transmission occurs in the market along with proportional changes. The worldwide markets, as expected, appear to be driven in general by the US stock market.