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Integration among G7 Equity Market : Evidence from iShares

May 2005

Abstract

We study the evolution of global equity market integration using US dollar denominated
iShares. Designed to mimic the movements of MSCI indices, these securities provide an easy
pool of international diversification products for the investor. As such they allow us to conduct an
analysis of the largest equity markets comovements devoid of problems associated with trading
restrictions, exchange rates fluctuations and non-synchronous trading. In contrast to most of the
previous studies, we apply time varying methodology for the analysis of both short-term and
long-term comovements that provide detailed evidence on the pattern and dynamics of the equity
market linkages. We find evidence in favour of increasing conditional correlations for all of the
markets since 2001. Time-varying and recursive cointegration tests provide somewhat weak
evidence in favour of the presence of bivariate cointegration relationships, but stronger evidence
in the multivariate case, suggesting limited diversification opportunities for the U.S. based
investor in the long run.

Keywords: Stock Market Integration, G7 Stock markets, Cointegration, GARCH

JEL Classification: G10, G15

* Lucey and Voronkova would like to thank Government of Ireland through the Program for
Research in Third Level Institutions (PRTLI) for financial support for this project.

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