Measuring Market Integration during Periods of Crisis and Contagion

  • Weiping Qin

Student thesis: Phd


In this thesis, I propose an alternative simple and accurate measure of market integration during financial crises based on Pukthuanthong and Roll (2009). I examine how financial crises affect market integration at the aggregate level in equity markets and in bond markets, and at the country and industry level in industry portfolios. The first essay investigates the determinants of explanatory power in a multi-factor model during global crises. We find that explanatory power is determined by three elements: factor heteroscedasticity, changes in factor loadings and residual heteroscedasticity. Using a counterfactual analysis, we establish the effects of each element on integration for 53 financial markets during six recent crisis periods: the 1987 US crisis, the 1994-1995 Mexican crisis, the 1997 Asian crisis, the 1998 Russian/LTCM crisis, the 2007-2009 Global Financial crisis (GFC) and the 2009-2014 European Sovereign Debt crisis (ESDC). We find that the unconditional market integration is much lower for most markets during crisis periods than implied. Moreover, high factor volatility and changes in factor loadings during most crises typically causes upward changes in the percentage of one market’s return explained by global risk factors. The influence of residual heteroscedasticity is negative on explanatory power and after adjusting for the bias caused by this factor, explanatory power becomes larger. We also find contagion exists worldwide in most crises except for the 1994-1995 Mexican crisis and 2009-2014 ESDC. Besides, there is strong evidence of increasing market integration in most markets, The second essay decomposes market integration and investigates the degree and dynamics of industry-level and country-level market integration in 640 industry portfolios. The market integration is estimated by the explanatory power of global country or industry risk factors on industry portfolios’ returns during stable periods. Explanatory power is adjusted by the bias caused by factor and residual heteroscedasticity and changes in factor loadings during financial crises. Country-level market integration is much higher than industry-level market integration over time during stable periods, but the differences of the two types of market integration become small during financial crises in most cases. Besides, country-level market integration has an increasing trend over time but industry-level market integration illustrates different trend across different industries. Finally, the country effects dominant industry effects during normal periods but during crises, the industry effects become strong and play an indispensable role in many industries, including Consumer Goods, Financials, Industrials and Oil & Gas. The third essay studies the dynamics of market integration in government bond markets. It investigates how the method proposed by Pukthuanthong and Roll (2009) suffers from bias in measuring market integration during financial crises, the differences in market integration across markets, whether markets become more integrated over time and the effects of maturities on market integration. We argue that market integration can be measured by the explanatory power of global risk factors on bond index returns during stable periods but this measure must be corrected for bias during the periods of financial crisis. The results indicate that the method of Pukthuanthong and Roll (2009) underestimates market integration during crises and the bias-adjusted method provides a more accurate measure of market integration. Developed markets experience increasing market integration over time, more than emerging markets. Most of the emerging markets provide no evidence of greater market integration. The EMU markets become almost fully integrated after the introduction of the Euro. Market integration also increases with maturity.
Date of Award1 Aug 2019
Original languageEnglish
Awarding Institution
  • The University of Manchester
SupervisorStuart Hyde (Supervisor) & Sungjun Cho (Supervisor)


  • equity markets
  • contagion
  • bong markets
  • market integration
  • financial crisis

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