Premium
Testing for international equity market integration using regime switching cointegration techniques
Author(s) -
Davies Andrew
Publication year - 2006
Publication title -
review of financial economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.347
H-Index - 41
eISSN - 1873-5924
pISSN - 1058-3300
DOI - 10.1016/j.rfe.2005.11.002
Subject(s) - cointegration , economics , equity (law) , predictability , econometrics , financial economics , market integration , markov chain , index (typography) , monetary economics , macroeconomics , mathematics , statistics , world wide web , political science , computer science , law
Using MSCI total return index data, this paper analyses the degree of international equity market integration using modern cointegration techniques. The existence of a long run equilibrium across equity markets is important since it implies a violation of weak form market efficiency. Short run deviations away from equilibrium can be expected to reverse, thereby implying a degree of market predictability. This analysis adds to the existing literature by considering a regime switching cointegration relationship that allows for multiple structural breaks over time. The analysis provides scant evidence in favour of market integration with a single regime treatment. There is, however, significant evidence to support a two‐regime Markov switching long‐run equilibrium relationship that has evolved since the 1970s.