Empirical analysis of stock return synchronicity comparison of developed and emerging markets
Creators: name: Khandaker, Sarod
Publisher: name: RMIT University
Year: 2024

description: This thesis analyses the stock market synchronicity of 34 emerging markets and compares the findings with seven developed markets. The study uses weekly stock return data and the final dataset includes approximately 20.8 million weekly observations for 40,014 firms across the world. <br><br>Morck et al. (2000) are among the first to introduce the topic of stock market synchronisation and argue that stock markets in economies with high per capita GDP move in a relatively unsynchronised manner over time, in contrast to stock prices in low per capita GDP economies. They also suggest that stock synchronicity is associated with macroeconomic indicators including rule of law, inflation, corruption and geographical size. In addition, Skaife et al. (2006) propose a further measure of stock synchronicity based on the proportion of zero returns and argue that the zero-return measure is a superior measure of stock market co-movement. The study uses both measures proposed by Morck et al. (2000) and one measure proposed by Skaife et al. (2006) for synchronicity analysis and extends the analysis to cover a ten year period, a larger sample of shares and more recent measures of country specific characteristics. <br><br>It is found that stock markets in emerging economies are more synchronous than in developed economies over the sample period using the classical measure. It is also found that over the 10-year study period the synchronicity measure is stationary. There is evidence of a statistically significant negative correlation between stock synchronicity and both government accountability and corruption for the emerging markets using the cross-sectional analysis. <br><br>The R-square measure of stock synchronicity averages 0.091 for the emerging markets and 0.045 for the developed economies, suggesting that higher stock price co-movement is evident in emerging economies. Further, there is a statistically significant positive correlation between the R-square measure and both corruption and inflation. <br><br>The study also uses the zero-return measure of stock synchronicity suggested by Skaife et al. (2006). It is found that the zero-return measure for emerging economies is higher than for developed economies. Surprisingly, China and the S&amp;P 500 group of companies exhibit the lowest values for the zero-return measure during this period, which is inconsistent with the classical measure and the R-square measure. <br><br>Further, panel data analysis shows that GDP per capita and trade openness have a strong effect on the zero-return measure. The Pearson correlation and Spearman rank correlation coefficient indicate that the classical measure and the R-square measure are positively correlated and appear to capture similar aspects of the markets in the study, which is also consistent with cross-sectional analysis results. In contrast, the zero-return measure shows either insignificant or negative correlation with the classical measure and the R-square measure for most sub-period and full period analysis. <br><br>Finally, there is evidence that emerging stock markets are more synchronous over time than in developed financial markets. It is found that common-law country stock synchronicity is lower than in civil-law countries or post-communist countries using the classical measure and the R-square measure.