International Stock Market Cointegration Under the Risk-Neutral Measure

35 Pages Posted: 29 Jul 2016

See all articles by Marie-Hélène Gagnon

Marie-Hélène Gagnon

Université Laval - Faculté d'Administration

Gabriel Power

Université Laval - Département de Finance et Assurance

Dominique Toupin

Bishop’s University - Williams School of Business

Date Written: July 28, 2016

Abstract

This paper investigates international cointegration and financial integration among equity market indexes using index option data, providing an ex-ante analysis through investor anticipations. Daily time series of risk-neutral variance, skewness, and kurtosis are constructed for five major indexes for three sub-periods between 2003 and 2013.

Fractionally cointegrated VAR models are estimated at the international level, accounting for persistence in risk-neutral moments. Our results show that there exist international equilibria in risk-neutral moments defined by several cointegrating vectors. During the 2007-2009 global crisis period, these equilibria are characterized by an increase in persistence and in the speeds of adjustment. Moreover, for risk-neutral variance and skewness, all markets are included in the equilibria and none are weakly exogenous. Outside the global crisis period, the cointegration relationship is more fragmented, especially for higher-order moments. In particular, crash and tail risks are segmented during the European debt crisis.

Keywords: financial markets cointegration, financial integration, option-implied distribution

JEL Classification: F36, G13, G14

Suggested Citation

Gagnon, Marie-Hélène and Power, Gabriel and Toupin, Dominique, International Stock Market Cointegration Under the Risk-Neutral Measure (July 28, 2016). Available at SSRN: https://ssrn.com/abstract=2815528 or http://dx.doi.org/10.2139/ssrn.2815528

Marie-Hélène Gagnon (Contact Author)

Université Laval - Faculté d'Administration ( email )

Quebec G1K 7P4
Canada

Gabriel Power

Université Laval - Département de Finance et Assurance ( email )

Pavillon Palasis-Prince
Quebec G1K 7P4
Canada

Dominique Toupin

Bishop’s University - Williams School of Business ( email )

Canada

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