Equity Market Linkage and Multinational Trade Accords: The Case of NAFTA

31 Pages Posted: 1 Jul 2004

See all articles by Ali F. Darrat

Ali F. Darrat

Louisiana Tech University - College of Business

Maosen Zhong

University of Queensland - Business School

Abstract

This paper examines the impact of multinational trade accords on the degree of stock market linkage using NAFTA as a case study. Besides liberalizing trade among the U.S., Canada and Mexico, NAFTA has also sought to strengthen linkage among stock markets of these countries. If successful, this could lessen the appeal of asset diversification across the North American region and promote a higher degree of market efficiency. We assess the possible impact of NAFTA on market linkage using cross correlations, multivariate price cointegrating systems, speed of convergence, and generalized variance decompositions of unexpected stock returns. The evidence proves robust and consistently indicates intensified equity market linkage since the NAFTA accord. The results also suggest that interdependent goods markets in the region are a primary reason behind the stronger equity market linkage observed in the post-NAFTA period.

Keywords: NAFTA, equity market linkage, cointegration, speed of convergence, long-run price equilibrium; generalized variance decompositions

JEL Classification: F36, F15

Suggested Citation

Darrat, Ali F. and Zhong, Maosen, Equity Market Linkage and Multinational Trade Accords: The Case of NAFTA. Available at SSRN: https://ssrn.com/abstract=556470 or http://dx.doi.org/10.2139/ssrn.556470

Ali F. Darrat

Louisiana Tech University - College of Business ( email )

Department of Economics & Finance
P.O. Box 10318
Ruston, LA 71272
United States
318-257-3874 (Phone)
318-257-4253 (Fax)

Maosen Zhong (Contact Author)

University of Queensland - Business School ( email )

Brisbane, Queensland 4072
Australia

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