The effects of uncertainty on the dynamics of stock market interdependence: Evidence from the time-varying cointegration of the G7 stock markets

Abstract

This study investigates the dynamic pattern of interdependence among the stock markets of the G7 member countries over the period from 1990 to 2023. The state-space formulation of the time-varying cointegrating coefficient makes it possible to examine the potential drivers of disruption in the long-run co-movement of markets. The results reveal that variations in a number of financial risk factors, economic policy uncertainty (EPU) and world geopolitical risk (GPR), have a significant impact on cointegrating coefficients. Further analysis on the co-movement of the augmented and the unaugmented cointegrating coefficients suggests that globalisation has reduced market segmentation causes to our risk factors.