ABSTRACT

This chapter provides a theoretical discussion of the general issue of equity market integration. It discusses the concept and measurement of equity market integration. Equity market integration has been studied through the examination of any one or a combination of the following attributes of financial market integration: degree of price equality among markets, degree of co-movement of prices, degree of barriers, and (d) speed of price adjustment. Three approaches are usually used in measuring co-movement: correlation, cointegration, and Granger-causality. Cointegration and Granger-causality avoid some of the difficulties associated with correlations. Related to economic integration, Janakiramanan and Lamba argue that the market with the dominant economy in the world will cause its stock market price to drive prices in stock markets of other countries. Factors such as economic integration, multiple listing of stocks, institutionalisation, securitisation and market contagion affect the extent of integration between different equity markets.