Market integration and globalization of financial markets: Evidence from Portugal, Spain, UK, Japan and US

Abstract

This paper analyzes the stock market globalization on the basis of the price theory. This leads to the concept of market integration which, under the nonstationarity of price level variables, can be empirically tested by using cointegration techniques. An error correction model incorporating prices and returns is specified and empirically tested. The results show that the five stock markets under analysis are cointegrated and there is just one cointegrating vector that explains the longrun relationship between these markets. Market integration holds for the system as a whole but full price transmission is only accepted for some pairs. The results show that price movements between pairwise stock markets are usually highly nonlinear.