demonstrating that comovements between markets increase during volatile periods. Our findings
also support Schwebach, Olienyk and Zumwalt (2002) study in this context that found increase in
correlation and volatility after the Asian crisis for 11 foreign markets that included five of the
seven G7 markets. Another peak in correlations follows in the mid of 1998. The third regime is
characterized by volatile correlations during 2000. which from 2001 onwards are characterized
by generally rising conditional correlations between SPDR and iShares of the G7 countries, with
the correlations levels fluctuating around 0.6.
[Figure 3 about here]
7. Conclusions
Our study examines the extent of long and short-term interdependencies between the US
and other developed equity markets. Contrary to most of the published studies in international
financial integration that use data on broad stock market indices, our study utilizes price series of
US and other G7 exchange traded funds, namely SPDR and iShares, to provide empirical
evidence on diversification opportunities. Furthermore, our study provides an in-depth analysis of
the status of integration of G7 markets by drawing from a number of advanced econometric
techniques focusing on the time varying nature of both short term and long term market
relationships.
Our findings suggest that the extent of short-term interdependencies has been increasing
since 2001, as reflected in the increased conditional correlation between daily international
returns. The evidence in favor of bivariate cointegration is somewhat weak. However,
multivariate recursive cointegration test shows an increase in the number of significant common
equilibrium relationships since 2001 that appears to have stabilized at two for the G7 ETFs. We
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