Journal of Economics and Finance

, Volume 36, Issue 2, pp 463–480 | Cite as

On the cointegration of international stock indices

Article

Abstract

This paper investigates the cointegration relationship among a group of international stock indices in light of new developments of econometric methods. Kasa (1992) first documented strong evidence for cointegration relations among five national stock indices, which suggests that there exists a common trend among those stock indices. Using Johansen multivariate cointegration test, we find that his findings are persistent in a sample of longer periods and more countries. In order to investigate whether these results are driven by statistical biases related to the sample size, we apply to our tests the Johansen’s small sample correction factor. The results still point toward the existence of a cointegration relationship but the evidence becomes much weaker. We next examine the empirical patterns emerged from different lag specifications and argue that Kasa’s findings are more likely due to the size distortion in extreme long lag VAR models. Indeed, when we employ a newly developed non-parametric test that does not require estimation VAR models, the null hypothesis of no cointegration cannot be rejected for the original sample of Kasa’s five-country stock indices from 1974 to 1990, nor for the extended period from 1970 to 2003.

Keywords

Cointegration Market Efficiency Johansen’s Test Non-parametric Cointegration Test 

JEL Classification

G14 G15 

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Copyright information

© Springer Science+Business Media, LLC 2010

Authors and Affiliations

  1. 1.Department of Accounting and Finance, College of BusinessSan José State UniversitySan JoseUSA
  2. 2.Department of Accounting and Finance, College of BusinessSan José State UniversitySan JoseUSA

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