| Previous studies generally define market integration from two different views. Earlier studies investigate market integration from a financial asset pricing perspective, in which national markets are considered to be integrated if securities with the same risk characteristics are priced the same across borders. Another line of research defines market integration from a statistical perspective and markets are considered to be integrated if national stock prices share a common long run equilibrium relationship. This research adopts the latter view and uses Johansen's (1988, 1991) cointegration test as the main methodology to empirically test equity market integration in the Great China Economic Area, including Mainland China, Hong Kong, and Taiwan. Their interrelationship with two well-developed markets, Japan and the United States, are also examined.;Weekly country equity market indices from Morgan Stanley Capital International are used for the empirical tests. The sample period covers January 1993 to July 1999. Cointegration tests are applied to nineteen different combinations of stock markets under study. The test results consistently indicate that Chinese, Hong Kong, and Taiwanese equity markets are not cointegrated. Additionally, they are not cointegrated with either Japanese or the US market, implying that these markets are not integrated at bivariate and multivariate levels. Therefore, investors can enjoy long run international diversification benefits by investing across these Asian markets. Since cointegration implies error correction representation of the variables, the insignificant results from cointegration tests also imply the weak form efficiency in the markets under study. This finding is further supported by the results from the Granger causality tests and cross-correlation function analysis, where I find that the intertemporal relationships between these markets are mainly contemporaneous with no lead or lag effect. Thus, past price information in one market can not be used to help predict future prices in another market. |
