Computing stock price comovements with a three-regime panel smooth transition error correction model

Computing stock price comovements with a three-regime panel smooth transition error correction model This paper studies the hypothesis of stock price comovements toward the US market for a large sample of developed and emerging stock markets (G6, BRICS, and MENA) over the periods of February 1970–June 2012, January 1995–June 2012, and June 2005–June 2012. To consider cross-market heterogeneity and asymmetrical time-variation in stock market integration, we propose an innovative threshold panel cointegration specification based on a panel smooth transitions error correction model. This specification enables us to identify different integration regimes that transit smoothly, which further reproduces the effects of market frictions and behavioral heterogeneity among the markets under consideration. Accordingly, we distinguish between efficient and inefficient market states. Further, we show that, while MENA and BRICS are segmented with the US market, a nonlinear mean-reversion of stock prices is observed for the G6 markets, suggesting evidence of heterogeneous threshold market integration. This suggests global diversification benefits from a US-MENA portfolio, while only per-regime investment opportunities appear for US-G6 and US-BRICS portfolios. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Annals of Operations Research Springer Journals

Computing stock price comovements with a three-regime panel smooth transition error correction model

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Publisher
Springer Journals
Copyright
Copyright © 2018 by Springer Science+Business Media, LLC, part of Springer Nature
Subject
Business and Management; Operations Research/Decision Theory; Combinatorics; Theory of Computation
ISSN
0254-5330
eISSN
1572-9338
DOI
10.1007/s10479-018-2805-3
Publisher site
See Article on Publisher Site

Abstract

This paper studies the hypothesis of stock price comovements toward the US market for a large sample of developed and emerging stock markets (G6, BRICS, and MENA) over the periods of February 1970–June 2012, January 1995–June 2012, and June 2005–June 2012. To consider cross-market heterogeneity and asymmetrical time-variation in stock market integration, we propose an innovative threshold panel cointegration specification based on a panel smooth transitions error correction model. This specification enables us to identify different integration regimes that transit smoothly, which further reproduces the effects of market frictions and behavioral heterogeneity among the markets under consideration. Accordingly, we distinguish between efficient and inefficient market states. Further, we show that, while MENA and BRICS are segmented with the US market, a nonlinear mean-reversion of stock prices is observed for the G6 markets, suggesting evidence of heterogeneous threshold market integration. This suggests global diversification benefits from a US-MENA portfolio, while only per-regime investment opportunities appear for US-G6 and US-BRICS portfolios.

Journal

Annals of Operations ResearchSpringer Journals

Published: Apr 2, 2018

References

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