A cointegration analysis between Mercosur and international stock markets

Abstract

This paper deals with an empirical investigation on the existence of long-run relationships among the two most important Mercosur stock market indexes (the Argentine Merval and the Brazilian Ibovespa) and two major international stock price indexes (the Japanese Nikkei and the US Dow Jones) and also with the estimation of short-run responses of those two emerging stock markets. Bivariate and multivariate cointegration tests indicate that there is no common trend linking the Argentine and the Brazilian stock price indexes. This result can be seen as a drawback to a proposal of stock market integration in Mercosur. On the other hand, cointegration between the two Latin American stock markets and the Dow Jones cannot be rejected. Based on an error correction mechanism, the estimated short–run elasticities show that the Ibovespa index is more responsive to changes in the Dow Jones than the Merval index.