وابستگی متقابل اقتصادی و روند تصادفی مشترک: تجزیه و تحلیل مقایسه بین اتحادیه اقتصادی و پولی و غیر اقتصادی و بازار سهام اتحادیه پولی

Whether economic interdependence among countries is a contributing factor to cointegration and common stochastic trends in international stock markets is indiscernible due to contradictory results from prior empirical work. This study aims to add clarity to this issue through a more distinct grouping of countries and methodological enhancements. A comparative analysis of cointegration is conducted between stock market price indices of major Economic and Monetary Union (EMU) and non-EMU countries. The conventional Johansen methodology is augmented with several diagnostic techniques (that have not been all inclusive in previous studies) to ensure the robustness of test results. Major findings pertinent to investors and policymakers are that economic interdependence appears to be the important contributing factor and that the U.S. stock market does not exert influences on long-run performances of other included stock markets. Furthermore, while the UK is not an EMU member, it may be viewed as a quasi EMU participant due to its stock market being cointegrated with and yet one of the common stochastic trends (besides those of Germany, Italy, and the Netherlands) within the EMU stock markets under investigation.

The degree of international stock market interdependence has received considerable attention in empirical research. Previous studies, including Eun and Shim (1989), King and Wadhwani (1990), Koutmos (1996), Park and Fatemi (1993), and Rahman and Young (1994), examine and generally find strong evidence of short-run interdependence among national stock markets via contemporaneous correlations and lead–lag relationships of returns and volatility transmissions. On the other hand, prior studies, especially the more recent ones, investigate long-run interdependence by employing a cointegration analysis of representative stock market price indices of various nations. Evidence of cointegration necessitates the presence of cointegrating vectors (CIVs) or equilibrium constraints precluding the cointegrated indices from diverging from one another in the long run. Such constraints transpire because these indices share common stochastic trends or the driving forces underlying their mutual growth over extended time horizons (Gonzalo & Granger, 1995). Blackman, Holden, and Thomas (1994), Lee and Jion (1995), Masih & Masih, 1997, Masih & Masih, 2002 and Masih & Masih, 2001a, and Parhizgari, Dandapani, and Bhattacharya (1994) suggest that financial market globalization—including deregulation, harmonization of regulations, and improvements in communication technology that allow investors to participate in international stock markets more freely, quickly, and informatively than ever before—is a contributing factor to cointegration and common stochastic trends in international stock markets. As a larger number of investors compete to earn superior returns, stock prices in different countries should closely reflect the underlying economic fundamentals. Consequently, economic interdependence among the subject countries may emerge as an additional explanatory factor; common stochastic trends in stock markets of those countries potentially mirror their economic fundamentals that are related significantly with one another. Corhay, Rad, and Urbain (1993) examine stock markets of European Union (EU) countries; Atteberry and Swanson (1997) study those of three North America Free Trade Agreement (NAFTA) countries; and Masih and Masih (2001b) investigate those of Australia and Asian newly industrialized countries (NICS). They find evidence of cointegration and relate it to economic interdependence via economic policy cooperation and substantial trades among the countries under investigation. The same conclusion is reiterated by other studies as well (e.g., Chen et al., 2002, Cheung & Lai, 1999 and Serletis & King, 1997). However, other studies with contrary results are similarly in abundance. For example, Byers and Peel (1993) find that the UK, German, and Dutch stock markets are not cointegrated during the period after the UK abolition of exchange controls. Ewing, Payne, and Sowell (1999) find that NAFTA stock markets are not cointegrated over the period including the passage into the NAFTA in 1994. These results imply that economic interconnection within a group of countries does not contribute to cointegration of their stock markets once institutional impediments are eliminated. Knif and Pynnonen (1999) find a weak cointegrating relation within Nordic stock markets and none between them and other European stock markets despite strong subregional and regional economic ties. In addition, Bachman, Choi, Jeon, and Kopecky (1996) find a cointegrating relationship among EU stock market indices but none among non-EU counterparts during the 1980s. Over the entire sample period (1970s and 1980s), nonetheless, cointegration among EU stock indices is not evidenced although EU countries were major trading partners and had been eliminating intratrade barriers since the 1960s. Given conflicting findings from prior empirical work, this study intends to shed light on whether economic interdependence among the subject countries is an important contributing factor to cointegration and common stochastic trends in their stock markets. This is done within a comparative framework involving stock market price indices of major European Economic and Monetary Union (EMU) and non-EMU countries over the 1979–2002 period. In contrast to prior studies (including at the time looser country constituencies, thereby possibly leading to heterogeneous findings), this study incorporates for the first time an EMU segment of nations, which by its deliberate harmonization of policies should promote strong economic interdependence unparalleled by other groups of countries. An a priori observation is that stock prices are the present value of the expected future dividends that are influenced by economic fundamentals, and hence the common trends should be especially evidenced among EMU countries whose fundamentals are closely interrelated due to their utmost degree of policy coordination and economic integration via the monetary union. The distinct grouping of EMU vis-à-vis non-EMU countries should resolve the issue of inconclusive results and expectedly do so in favor of economic interdependence as the important contributing factor. A cointegration analysis is conducted via the Johansen cointegration methodology Johansen, 1988, Johansen, 1991, Johansen, 1992a, Johansen, 1992b, Johansen, 1994 and Johansen & Joselius, 1990.1 Although the Johansen methodology has been frequently employed in previous studies, this study updates its applications in at least two regards. First, the tests for appropriate deterministic specification in the vector autoregressive (VAR) estimation (whose importance is often overlooked) are explicitly conducted. Second, several diagnostic techniques (which have not been all inclusive in prior studies) are performed to ensure the robustness of the results from the conventional Johansen tests. These augmented procedures are motivated by Gonzalo & Lee, 1998 and Gonzalo & Lee, 2000, Gregory (1994), and Richards (1996), demonstrating that the conventional Johansen tests may lead one to incorrect conclusions regarding the number of CIVs in the system and hence invalid inferences because they tend to spuriously reject the null hypothesis of no cointegration under certain conditions. Cointegration and common stochastic trends in international stock markets imply that the long-run paths of stock market prices in these markets are driven by some shared economic growth factors underlying earnings and dividends (Crowder & Wohar, 1998). Thus, there are essentially fewer assets available to investors than a simple count of number, thereby suggesting a reduction in long-run diversification gains (e.g., Chen et al., 2002 and Hassan & Naka, 1996)2. This study finds that economic interdependence appears to be an important contributing factor to cointegration and common trends in international stock markets. Cointegration is strongly evidenced in the EMU group over the full sample, over the passage of time, and still so after accounting for two tumultuous events (the October 1987 U.S. stock market crash and the 1997 Asian financial crisis), while the same conclusion is not discernible in the non-EMU group. In addition, stock markets of Germany, Italy, the Netherlands, and UK are found to be the sources of common trends or the underlying growth factors in the EMU stock markets studied. These results are informative to EMU policymakers concerning their implementation of common policies aimed at the countries in the EMU area as well as to international investors regarding international portfolio allocation and evaluation in a long-run perspective. This study is organized as follows. Section 2 describes the data and clarifies the econometric methodology used, with estimation results and related findings presented in Section 3. Section 4 provides conclusions and their implications.

This study reexamines whether economic interdependence is an important contributing factor explaining cointegration and common stochastic trends in international stock markets. A comparative analysis is conducted between stock market price indices for five EMU and five non-EMU countries, exemplifying the groups of countries whose economies are and are not strongly interdependent, respectively. The conventional Johansen tests are implemented and augmented with diagnostic techniques to assure the robustness of the test results. Stock market price indices of the included non-EMU countries are not cointegrated over the full sample period, nor over time, nor after taking into account the 1987 U.S. stock market crash or the 1997 Asian financial crisis. The absence of cointegration implies that each national stock market is driven by its own unique stochastic trends or fundamentals, which in turn implies that the global significance of the U.S. economy and the established roles as financial centers of the U.S. and UK stock markets—included as control variables—do not make these two markets influence the long-run paths and performances of others. Stronger economic interrelations among the countries may be needed to warrant cointegration and common stochastic trends in their stock markets. Stock market price indices of the five EMU countries studied are cointegrated over the full sample period, over time, and even after controlling for the 1987 U.S. stock market crash or the 1997 Asian financial crisis. The strength of cointegrating relations over the passage of time reflects the extent of economic interdependence among EMU countries. The increased significance of the first CIV after the mid-1990s parallels the cooperative efforts among the prospective EMU countries to integrate their economies prior to the official EMU inception in 1998. The emergence of the second CIV in year 2000 potentially mirrors further reinforcement of economic interconnection via the common currency (euro) and monetary policy shared among EMU participants. The findings that the U.S. stock index can, while any of the EMU indices cannot, be excluded from cointegration relations also support these interpretations. Consistent with a priori observations, the comparative results from the EMU and non-EMU groups suggest that economic interdependence among the subject countries appears to be an important contributing factor to cointegration and common stochastic trends in their stock markets. International investors may improve diversification gains over long-time horizons by allocating their portfolios into stock markets of the countries that do not have substantial economic ties. The lack of cointegration between the U.S. and stock markets in both groups makes it an attractive avenue to achieve such gains. Additionally, despite a decrease in long-run diversification benefits from cross-border investments into EMU stock markets, international investors may benefit from an identification of the sources of common stochastic trends. They should evaluate their long-run investment portfolios conditioning upon the prospects of stock markets of Germany, Italy, Netherlands, and the UK that are weakly exogenous, and hence underlying the long-run conduits of (and hence the returns on) stock markets in the EMU area. Common stochastic trends in the EMU stock markets imply that their stock index prices trend upward together over time because they share some mutual economic growth factors governing earnings and dividends. These factors should gradually narrow the disparity between relatively strong and weak economies (i.e., countries) within the EMU area and facilitate the effectiveness of common policies implemented by EMU policymakers and thus the long-run stability of the union. An investigation into why stock markets of Germany, Italy, the Netherlands, and UK are weakly exogenous should prove informative. Cointegration between the UK and major EMU stock markets is possibly described by its quasi participation in the EMU, resulting from its long-established economic ties with EMU countries, whereas its weak exogeneity is potentially explained by its policy autonomy, resulting from its decision not to formally join the EMU. Furthermore, Germany and the Netherlands with relatively sound economies may play the dominant roles in defining the EMU common policies and consequently lead the mutual growth of EMU stock prices. On the other hand, Italy with a comparatively tenuous and yet important economy may have economic fundamentals that are insufficiently aligned with others. This possibility may enable its stock market to be one of the common stochastic trends, underlying long-run paths of stock market index prices and hence returns in major EMU nations.