Dynamics of stock market integration between the US and the BRIC

Abstract

This study investigates the evolving pattern of integration and Granger-causality relationships between the developed US and developing BRIC stock markets. The study uses both the linear Engle-Granger cointegration test and the nonlinear Enders-Siklos cointegration test for comparative analysis, and it expands the consistent momentum threshold autoregressive model and the threshold error correction model by time-varying approaches for dynamic analysis. The evidence demonstrates that both long-run time-varying nonlinear cointegration relationships and short-run time-varying Granger-causality relationships exist between the stock markets of US-Brazil, US-India, US-Russia and US-China (US-BRIC). Furthermore, these relationships were altered in the short-run during 2007/2008, when the subprime mortgage financial crisis in the US occurred. The empirical results demonstrate that the stock markets of Brazil, Russia and China have begun exerting significant influences on the Dow Jones to some extent after 2006, and the Dow Jones index continues to play a dominant role and increasingly, Granger-causing shifts in the emerging markets of Russia, India and China. The findings demonstrate the time-varying nature of the nonlinear cointegration and Granger-causality relationships, and also indicate that the potential benefits from international risk diversification may have gradually diminished between these studied markets.