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Common factors in international stock prices: Evidence from a cointegration study
Journal article   Peer reviewed

Common factors in international stock prices: Evidence from a cointegration study

Daniel Bachman, Jongmoo Jay Choi, Bang Nan Jeon and Kenneth J. Kopecky
International review of financial analysis, v 5(1), pp 39-53
1996
DOI: https://doi.org/10.1016/S1057-5219(96)90005-8

Abstract

This paper uses multilateral and bilateral cointegration techniques to examine the stock market behavior of the seven major industrial countries (Group of Seven) over the 1970–1989 period and to determine the consistency of three alternative hypotheses with the available evidence. As explanations of the common trend in stock prices, the hypotheses include technological change, trade liberalization and financial deregulation. Our results show that none of the three macroeconomic hypotheses are consistent with all the cointegration tests. When all the countries are included, the tests indicate the presence of at least one common trend among the stock price levels, a finding that is also consistent with a multifactor international asset-pricing model. However, as we proceed to disaggregate to smaller sets of countries, including all the bilateral relations as the smallest possible subset, the finding of a common trend becomes more tenuous. Overall, our results indicate that each of the three hypotheses has empirical support over both different subgroups of countries and periods of estimation.

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