Economic determinants of emerging stock market interdependence

Abstract

There is a wealth of literature on how integrated stock markets are, but very few studies attempts to determine why stock markets are integrated. However, it is arguably even more important to understand the driving forces behind stock market relationships than to know whether they exist. Such an understanding will provide a better grasp of the functioning of the global stock markets and allow investors and policy-makers to ask additional questions such as: Would an increase in bilateral trade between two countries, for example due to a new trade agreement, change the interdependence of their stock markets? If the growth rate of a particular emerging market falls due to the current global economic downturn, will its stock market drag along all the other stock markets or can it be known beforehand which stock markets are more likely to follow? This study empirically estimates cross-section and time-series models to determine the fundamental factors that influence the correlation and evolvement of the correlation between emerging stock markets.