Global Market Integration: An Alternative Measure And Its Application

Many previous studies of international markets have attempted to measure integration by correlations among broad stock market indexes. Yet such correlations have been found to poorly mimic other measures of integration. Paper shows that a simple correlation between two stock markets is likely to be a poor indicator of integration for a very simple reason: when there are multiple factors driving returns, such as global macro factors or even industry factors, two markets can be perfectly integrated and yet still be imperfectly correlated. For most countries, there has been a marked increase in measured integration, but this is not indicated by simple correlations among country indexes.