Abstract
This article examines the linkage between two parallel stock exchanges trading the same shares in Colombia, namely the Bogotá Stock Exchange and the Medellín Stock Exchange. We provide empirical evidence to support the hypothesis that these two markets can be best described as fully integrated over a period of almost four decades, which is consistent with the view that arbitrage opportunities are only possible in the short but not in the long-run. In addition, we find evidence that the location of a company's headquarters appears to matter in stock price formation.
Acknowledgements
We would like to thank Luis Eduardo Fajardo, Ana María Iregui and most especially Manuel Ramírez for useful discussions on several of the ideas developed in the article. We would also like to thank the Colombian Stock Exchange (Bolsa de Valores de Colombia – BVC) for help in obtaining some necessary data. Any remaining errors are ours.
Notes
1 An exception is Ahlgren and Antell (2002) who do not find evidence of cointegration among Finland, France, Germany, Sweden, the UK and the USA from January 1980 to February 1997.
2 Another country with more than one stock market is China, with the Shanghai Stock Exchange, the Shenzhen Stock Exchange and the Hong Kong Stock Exchange. The possibility of cointegration among these three markets was recently studied by Zhou and Zhou (2005), using aggregated daily indices for these stock exchanges from April 1991 to December 2002.
3 These three companies were BOGOTA (a commercial bank), COLTABACO (a tobacco company) and COLSEGUROS (an insurance company).
4 Although the Medellín Stock Exchange was created in 1961, the analysis starts in 1963 due to data availability.
5 The estimated error correction equations pass the LM statistic for testing the null of no serial correlation of up to order two. The ARCH effects reported in some of the equations are not surprising since we are dealing with financial time series and should not be taken as a signal of inadequate modelling of the conditional mean of the series, which is the main interest of the present analysis; see e.g. Lütkepohl (2004; p. 157). The normality failures are due to a few outliers; introducing impulse dummy variables to account for these atypical observations actually worsened the other diagnostic test statistics and so it was decided to leave them out of the models.
6 It should be mentioned that the Headquarters of AVIANCA are located in the city of Barranquilla. The Headquarters of CARIBE are also located in Barranquilla, although this company is actually owned by Grupo Empresarial Antioqueño, a conglomerate of companies based in Medellín.