Global financial markets integration: A comparative study between developed and emerging economies

Abstract

Co-integration of global financial markets has turned out to be an appealing research issue after global financial crisis of 2007-2008. Co-integration of global financial markets is a frequently researched phenomenon in the finance and economics literature. Most of the existing research work in market co-integration commonly used time series techniques to find out short-run and long-run relation among different financial time series. In 2007-2008, the world had seen drastic changes in the financial status of various economies. These drastic changes have been reflected due to the occurrence of various series of events starting with real estate bubble in the USA in 2007, Lehman brothers’ bankruptcy in 2008, and many other such events consecutively. These series of events resulted in a sharp drop in international trade, rising unemployment, and depreciating commodity prices. Markets across the world, which were going through bull phases, gradually began to fall down. Almost all indices have shown a negative performance during 2007-2008. It is a well-established fact that the performance of all the world stock markets is directly responsible for a significant amount of the world’s economic condition. In general stock market growth is a leading indicator that the state of an economy is flourishing, while declining trends indicate economic slowdown. Since stock markets are primarily based on investors’ confidence, the impact of such events becomes a prime factor which cannot be undermined while determining their performance. While stock markets reveal the economic state of the respective nations, their impact has been growing tremendously across national boundaries with the advent of globalization and liberalization, thereby making the co-integration among markets across the world imperative. Thus, this increased interdependency among markets has led to a global impact of the above events, causing Global Financial Crisis (GFC). Thus, this stock market co-integration plays a major role, especially during these times of crises. The concept of stock market integration focuses on the idea that economies can integrate among themselves through the use of the marketplace. Though this integration has given vast diversification for the investors, it has also introduced the factor of risk, due to which any major event is presumed to have a global impact. It is during a crisis in the financial markets that the importance of integration is highlighted. While there might be different factors which could affect economies worldwide, integration among these economies considerably amplifies the impact that they could possibly create. Thus, we see that integration among economies has its own pros and cons depending on the situation. Considering the pivotal role that stock market integration plays in the world of markets, this chapter attempts to study co-integration among different economies and how the degree of co-integration varies in times of global events. This could provide an insight as to how different markets react to global crisis nowadays and might be helpful in providing scope for further work in what could be done to mitigate the undesirable effects of integration. The integration among economies has been found to vary from time to time and also the extent or degree to which integration exists fluctuates. Hence, it becomes important for us to select the time during which we plan to conduct the study. This chapter analyzes whether the patterns of global market integration have changed because of the financial crisis of 2007-2008. Our data set consists of ten market indices from three major continents around the world considering three phases during the period of 2005-2011.