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Common stochastic trends in international stock prices and dividends: an example of testing overidentifying restrictions on multiple cointegration vectors

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  • Tom Engsted
  • Jesper Lund

Abstract

Based on a cointegrated VAR model, a joint test of the within-country and crosscountry low-frequency implications of the present value model of stock prices is derived and applied to postwar annual stock market data from four European countries. Following Johansen (1995) and Johansen and Juselius (1994) the test is formulated as a test of overidentifying restrictions on multiple cointegration vectors. The analysis is similar in spirit to the analysis carried out by Kasa (1992). However, whereas Kasa analyses prices and dividends in two separate VAR models and does not test restrictions implied by the present value model on the cointegration vectors, we perform the analysis within one comprehensive VAR model and test the full set of within-country and cross-country implications by a single likelihood ratio test. The empirical results indicate the presence of common trends among dividends in the four countries; how many is, however, difficult to judge. Furthermore, the results of the tests of the overidentifying restrictions are not clearcut. If dividends share one or two common trends the restrictions are not rejected at standard significance levels. However, if dividends share three common trends, the restrictions are strongly rejected.

Suggested Citation

  • Tom Engsted & Jesper Lund, 1997. "Common stochastic trends in international stock prices and dividends: an example of testing overidentifying restrictions on multiple cointegration vectors," Applied Financial Economics, Taylor & Francis Journals, vol. 7(6), pages 659-665.
    • Handle: RePEc:taf:apfiec:v:7:y:1997:i:6:p:659-665
    DOI: 10.1080/758533857
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    2. Michael E. Drew & Leonard Chong, 2002. "Stock Market Interdependence: Evidence from Australia," School of Economics and Finance Discussion Papers and Working Papers Series 106, School of Economics and Finance, Queensland University of Technology.
    3. Apergis, Nicholas & Christou, Christina & Miller, Stephen M., 2014. "Country and industry convergence of equity markets: International evidence from club convergence and clustering," The North American Journal of Economics and Finance, Elsevier, vol. 29(C), pages 36-58.
    4. Papież, Monika & Śmiech, Sławomir, 2015. "Dynamic steam coal market integration: Evidence from rolling cointegration analysis," Energy Economics, Elsevier, vol. 51(C), pages 510-520.
    5. Tsutsui, Yoshiro & Hirayama, Kenjiro, 2004. "Are international portfolio adjustments a cause of comovements in stock prices?," Pacific-Basin Finance Journal, Elsevier, vol. 12(4), pages 463-478, September.
    6. Rangvid, Jesper, 2001. "Increasing convergence among European stock markets?: A recursive common stochastic trends analysis," Economics Letters, Elsevier, vol. 71(3), pages 383-389, June.
    7. Ahlgren, Niklas & Sjö, Bo & Zhang, Jianhua, 2008. "Panel Cointegration of Chinese A and B Shares," Working Papers in Economics 300, University of Gothenburg, Department of Economics.
    8. Niklas Ahlgren & Bo Sjo & Jianhua Zhang, 2009. "Panel cointegration of Chinese A and B shares," Applied Financial Economics, Taylor & Francis Journals, vol. 19(23), pages 1859-1871.
    9. Matei, Florin, 2014. "An empirical examination of stock market integration in EMU," MPRA Paper 60717, University Library of Munich, Germany.
    10. T Lorde & B Francis & A Greene, 2009. "Testing for Long-Run Comovement, Common Features and Efficiency in Emerging Stock Markets: Evidence from the Caribbean," Economic Issues Journal Articles, Economic Issues, vol. 14(2), pages 55-80, September.

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