Globalization and Granger Causality in International Stock Markets

Abstract

This paper analyzes the process of stockmarket globalization on the basis of cointegration andGranger causality tests. Granger causality is based onregression modelling and typically captures current andpast causal relationships in the data. The dataset used inour empirical analysis was drawn from DataStream andcomprises the natural logarithm of relative stock marketindexes since 1973 for the G7 countries. The main resultspoint to the conclusion that significant causal effectsoccur in this context with well-defined causal directions.There is also evidence that stock markets are closelyrelated in the long-run over the 36 years analyzed and, inthis sense, one may say that they are globalized. Asexpected, there is evidence that the US stock marketdominates in general over the remaining markets.