Linkages between emerging and developed equity markets: Empirical evidence in the PMG framework |
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Affiliation: | 1. Champagne School of Management, Groupe ESC Troyes en Champagne, Troyes, France;2. IRG, Université Paris Est, Créteil, France;3. College of Business Administration, King Saud University, Saudi Arabia;1. School of Information Management and Engineering, Shanghai University of Finance and Economics, Shanghai 200433, PR China;2. Institute of Accounting and Finance, Shanghai University of Finance and Economics, Shanghai 200433, PR China;3. IPAB, School of Informatics, The University of Edinburgh, Edinburgh EH89AB, UK;4. School of E-Business and Logistic, Beijing Technology and Business University, Beijing 102488, PR China |
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Abstract: | This paper empirically investigates the international equity market causal links between Central and South-Eastern Europe, on the one hand, and developed countries (Western Europe and the United States), on the other hand, over the monthly sample period spanning from October 2000 to September 2012. Unlike previous studies, we use the pooled mean group (PMG) approach of Pesaran et al. (1999), which is suitable to estimate dynamic heterogeneous panels to draw reliable conclusions. After cointegration is found between the stock markets of interest, the PMG estimates show evidence of each market's sensitivity to the fluctuations of the other markets over both the short- and long-run, supporting the feedback hypothesis. The impact of developed markets on emerging markets is more important than that of emerging markets on developed markets and the bidirectional impact is higher between emerging and Western European markets than between these emerging markets and the United States. These conclusions are robust to an alternative specification, which supports the view that the stock markets are closely interlinked. The findings are of great interest and have important implications for policy makers, investors, and practitioners. |
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Keywords: | Emerging equity markets Developed stock markets Causal linkage Dynamic heterogeneous panels PMG approach |
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