Determinants of Market Co-Movement in Developed and Emerging Markets

Abstract

Stock market integration is a research area that attempts to identify and explain the formation of price co-movement between stock markets on an international level. Efficient and integrated stock markets are said to have the ability to unfold and incorporate information flows deriving from national as well as global economic events on a timely manner. The movement toward a synchronized stock market landscape has gained momentum, especially during the past two decades, where tighter economical and financial linkages among developed economies have grown stronger. However, the rise of many important emerging markets, which have been a major driver of global growth in the past decades, has opened up additional channels for cross-border relations. Other causes behind the rapid increase in world trade, capital movements, and foreign investments between world economies are market liberalization/deregulation, technological advances, and removals of statutory controls. Many of these factors have contributed to more interlinked economies, which, in turn, are said to have given rise to a higher degree of stock market synchronization, especially in volatile time periods, for example, eruption of a financial crisis, war, or political instability.