Common Stochastic Trends in International Stock Markets: Testing in an Integrated Framework

23 Pages Posted: 20 Nov 2000

See all articles by Dimitris A. Georgoutsos

Dimitris A. Georgoutsos

Athens University of Economics and Business - Department of Accounting and Finance

Georgios P. Kouretas

Athens University of Economics and Business; IPAG Business School

Date Written: October 2000

Abstract

In this study we explore the implications for the identification of common stochastic trends among stock price indices of using data transformed in a "real dollar" basis. By applying a "general" VAR model where all the relevant variables (stock indices, consumer priced indices and the exchange rate) appear, we show that the expected results from the cointegration analysis differ substantially. In particular, the use of the "transformed" data pre-supposes that the Purchasing Power Parity condition has been imposed. If this is not the case then the adoption of the "transformed" data leads to an entirely different economic identification of the model where demand shocks play a crucial role and the coefficients of the cointegrating vectors should satisfy different restrictions. Other contributions of this paper is that it studies the problem under the light of recent developments in cointegration theory which allows us to implement our tests in the presence of 1(2) variables. Furthermore we fill a gap in previous studies by testing for the temporal stability of the cointegration results. Our results, on data for the USA and the UK, validate our approach since they make clear that the necessary restrictions for the Purchasing Power Parity to hold are not satisfied and moreover the results are sample dependent.

Keywords: International equity markets, 1(2) analysis, cointegration, identification, purchasing power parity, temporal stability

JEL Classification: G15, G12, G32

Suggested Citation

Georgoutsos, Dimitris and Kouretas, Georgios P., Common Stochastic Trends in International Stock Markets: Testing in an Integrated Framework (October 2000). EFMA 2000 Athens. Available at SSRN: https://ssrn.com/abstract=246822 or http://dx.doi.org/10.2139/ssrn.246822

Dimitris Georgoutsos (Contact Author)

Athens University of Economics and Business - Department of Accounting and Finance ( email )

76 Patission Street
GR-104 34 Athens
Greece

Georgios P. Kouretas

Athens University of Economics and Business ( email )

Department of Business Administration
Athens, GR-10434
Greece

HOME PAGE: http://www.aueb.gr/Users/kouretas/index_en.html

IPAG Business School ( email )

184 BD Saint Germain
Paris, 75006
France

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