|dc.description.abstract||The studies in this thesis examine financial integration: its extent across regions and market cycles, how culture affects it and how the levels of market linkages impact the effectiveness of policy decisions during periods of market crisis. This investigation is undertaken in four separate but interrelated studies.
The first study (Chapter 3) uses a novel approach, partial correlations within a complex network framework, to examine the degree of globalization and regionalization of stock market linkages and how these linkages vary across different economic or market cycles. The results show that geography influences network linkages differently across market cycles. During normal times, regional factors shape market linkages; however, during periods of turbulence, global rather than regional factors drive these linkages. Also, the network traffic increases during times of turmoil, but contrary to previous results, the results do not indicate a consistent or overwhelming increase in positive linkages between markets. Also, contrary to expectations, financial centers such as the US, China, Japan, and the UK command a greater regional rather than global influence. These findings have implications for portfolio management and policy decision-making.
The second study (Chapter 4) examines linkages between stock markets across market cycles by combining network and cointegration analysis. The results show that long-run linkages are likely to be global rather than regional and that market turbulence increases linkages. However, no widespread common stochastic trends between markets are detected. Also, the major financial markets fail to influence long-run network linkages.
The third study (Chapter 5) conducts a comprehensive study on the effect of culture on stock market linkages. A quantile regression model uses data from 25 national stock markets to estimate the determinants of market linkages. It controls for distance, economic and legal variables while using culture variables such as language, religion, and Hofstede’s culture dimensions. The study tests whether the effects of culture hold across regions, in markets with higher liquidity, and if changes occur during periods of market crisis. The main conclusion is that culture preferences shape investor choices, which affects the integration between stock markets. Equity markets with similar cultural characteristics tend to increase market linkages; however, differences are observed across regions. Furthermore, liquidity and economic uncertainty does not impact the significance of culture variables as determinants of market linkages.
The fourth study (Chapter 6) tests the hypothesis that policy interventions during periods of stress are less effective when markets are globally integrated. The tests are conducted in the context of the Chinese and Russian stock markets, which depict varying levels of linkages with the US market and were subject to policy interventions during the Global Financial Crisis. Using an event study in combination with dynamic conditional correlation and Markov regime switching methodology, a negative relationship exists between the degree of market linkages and the effectiveness of market interventions. The findings indicate that the market response in the Chinese market, which was less financially integrated with the US (than with Russia), was more effective. Thus, the study lends support to the hypothesis that policy interventions in equity markets become less effective when markets are integrated. This study is the first to investigate the impact of international market linkages on the effectiveness of stock market interventions.
The results from this research show that tighter market integration shapes the changing market networks due to structural changes and the forces of globalization. The dynamics of the market networks draw attention to the impact of contagion on market efficiencies, which has far-reaching negative consequences on policy decisions during periods of market crisis. Although these disruptive market crises are difficult to prevent, a deeper understanding of market networks can empower policy decision-makers in dealing with these fallouts. The financial networks can also have a far-reaching impact on arbitrage and portfolio risk management strategies. The findings of the research also highlight the role of behavioral variables such as culture, which affects not only the development of financial markets but also how the financial linkages are shaped.||