Abstract
Market deregulation and the free flow of capital have increased the globalization of financial markets and affected the nature of relationships among equity price movements across markets. The major world economies are now interdependent through trade and investment. Therefore, news about economic fundamentals in one country has implications for equity prices in other countries. Karolyi and Stulz (1996, p. 951) pointed out that increased international correlation of stock returns has the following four effects: (a) fewer domestic risks are internationally diversifiable, so portfolio volatility increases; (b) the risk premium on the world market portfolio increases; (c) the cost of capital increases for individual firms; and (d) the domestic version of the capital asset pricing model (CAPM) becomes increasingly inadequate.
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Notes
See Toda and Yamamoto (1995).
Also see Adler and Horesh (1974) and Agman (1974).
Strictly speaking, a VAR in differences is not consistent with a cointegrated system, whereas a VAR in levels could be. See Hamilton (1994, p. 579).
Also see Dickey and Puller (1979, 1981) and Said and Dickey (1985). Hamori and Tokihisa (1997) analyze the effects of heteroskedasticity on the unit root test.
Seasonal integration tests developed by Hylleberg, Engle, Granger, and Yoo (1990), Beaulieu and Miron (1993), Pranses and Hobijn (1997), and Tokihisa and Hamori (2001) are also applied. It is found that each stock price index does not include seasonal unit roots, and this is consistent with Hamori (2001) and Hamori and Tokihisa (2002). Pranses (1996) is a good reference for seasonal integration and cointegration tests.
See Enders (1995, pp. 396-400)
See Granger (1969) and Hamilton (1994, Chapter 11). Actually, there are several ways of implementing causal tests. A description of several testable forms of Granger’s causality can be found in Pierce and Haugh (1977), Geweke, Meese and Dent (1983) and Guilkey and Salemi (1982).
The explanation in this section is based on Toda and Yamamoto (1995). For the application of the LA-VAR model, see Hamori (2000a), Hamori and Imamura (2000), and Shan and Pappas (2000) for examples.
Using the conditional version of CAPM, Harvey (1991) also shows that Japanese market is not fully integrated with other world markets.
See Malliaris and Urrutia (1991) and Darrat and Dickens (1999) as a good example of the omission-of-variable problem.
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© 2003 Springer Science+Business Media New York
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Hamori, S. (2003). Stock Prices Across International Markets: A Traditional Approach. In: An Empirical Investigation of Stock Markets. Research Monographs in Japan-U.S. Business & Economics, vol 8. Springer, Boston, MA. https://doi.org/10.1007/978-1-4419-9208-6_2
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DOI: https://doi.org/10.1007/978-1-4419-9208-6_2
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