Market Integration in Developed and Emerging Markets

Abstract

This chapter presents the empirical test of market integration of international markets, dividing the sample between developed and emerging markets. This study examines the extent of cross-country returns’ co-movement between the stock markets of five developed benchmark countries (USA, UK, Japan, Germany, and France) and five emerging benchmark countries (Brazil, Russia, India, China, and South Africa), vis-à-vis a total country sample composed of 20 countries. On one hand, the general findings for the Geweke contemporaneous feedback measures provide supportive evidence of increased stock market integration. A reasonably clear time trend is identified, where the extent ofcontemporaneous co-movement across markets has intensified over time, especially for emerging countries, which consequently suggests that greater market efficiency is being fostered at the international level. On the other hand, the results of the Geweke unidirectional feedback measures indicate a tendency that some markets (USA, Brazil, Russia) are more likely to lead other markets (Japan, China) than vice versa. This insight on how country pairs’ daily stock market returns are correlated provides reference guidelines for policy-makers, investors, and other stakeholders with valuable information to assess the propensity of one country to be affected by market volatility stemming from regional and global shocks.