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Title:Testing for convergence in stock markets : a non-linear factor approach PDF Logo
Authors:Caporale, Guglielmo Maria
Erdogan, Burcu
Kuzin, Vladimir N.
Issue Date:2009
Series/Report no.:CESifo working paper 2845
Abstract:This paper applies the Phillips and Sul (2007) method to test for convergence in stock returns to an extensive dataset including monthly stock price indices for five EU countries (Germany, France, the Netherlands, Ireland and the UK) as well as the US over the period 1973-2008. We carry out the analysis on both sectors and individual industries within sectors. As a first step, we use the Stock and Watson (1998) procedure to filter the data in order to extract the long-run component of the series; then, following Phillips and Sul (2007), we estimate the relative transition parameters. In the case of sectoral indices we find convergence in the middle of the sample period, followed by divergence, and detect four (two large and two small) clusters. The analysis at a disaggregate, industry level again points to convergence in the middle of the sample, and subsequent divergence, but a much larger number of clusters is now found. Splitting the cross-section into two subgroups including Euro area countries, the UK and the US respectively, provides evidence of a global convergence/divergence process not obviously influenced by EU policies.
Subjects:stock market
financial integration
European Monetary Union convergence
factor model
JEL:C32
C33
G11
G15
Document Type:Working Paper
Appears in Collections:CESifo Working Papers, CESifo Group Munich

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