.Journal of Empirical Finance 6 1999 1–27 Economic determinants of evolution in international stock market integration

This study investigates how and why different pairs of national equity markets display differing degrees of co-movement over time. We interpret a greater degree of co-movement to reflect greater stock market integration. We hypothesize the extent of stock market integration may depend upon certain macroeconomic variables that characterize and influ-ence the degree of economic integration between two countries. As the degree of economic integration varies over time for a given pair of countries, we may expect the extent of equity market integration to vary systematically. We empirically investigate this hypothesis by employing a two-step procedure to explore first, how the degree of co-movement for a given pair of markets varies over time and second, why this interdependence varies over time. First, we employ daily data for nine national equity markets over 22 yearly samples to w . xestimate annual Geweke J. Am. Statist. Assoc. 77 1982 304–313 measures of feedback for different pairs of markets. For each pair of markets, the time series of 22 annual Geweke measures reveals the evolution in how co-movement in daily returns varies over time. Second, we specify a set of macroeconomic variables that characterize and influence the degree of economic integration for each pair of countries. Finally, we incorporate these variables in a pooled time series regression model across all possible pairs of these nine markets to estimate the influence of macroeconomic determinants on evolution in stoc