Global Stock Markets Integration 1

GLOBAL STOCK MARKETS INTEGRATION

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 Global Stock Markets Integration 2

Introduction

During the last two decades, stock markets have shifted from local operations to global

operations due to technological advancement, liberalization, and globalization. It is now possible

to trade stocks and other financial assets from any part of the world. Moreover, global

geopolitics plays a more prominent role in influencing the stock prices in different markets; for

example, during the current Covid-19 pandemic, stock market indexes experience the same

trends as if they were operating in the same market. The same case happens when the oil prices

increase; the stock prices that highly depend on the oil prices tend to follow the same trend.

According to (Borowski, 2018) growth and integration of the world capital market is the

critical pillar and driver of globalization since it enables efficient allocation of resources from the

region of higher concentration like developed countries to middle economies that can grow. To

understand the extent to which the global economy has been integrated, we will carry out

correlation analysis among major indexes around the world and determine which markets are

more related to others.

Analysis of the Stock Prices Correlation

In this section, we are going to carry out a correlation analysis of 10 major indexes

around the world; the indexes include FTSE 100 from the United Kingdom, S&P 500 from the

United States, S&P_TSX from Australia, CAC 40 from France, Nikkei 225 from Japan, Euro

Stoxx from European Union, Tadawul All share from United Arabs Emirates (UAE), DAX from

Germany and Karachi 100 from Pakistan.

The table below shows the correlation matrix for the stock prices of the global indexes.

The data has been analyzed using Microsoft excel using the data retrieved from yahoo finance

and Wall Street Journal.

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  FTSE S&P S&P_TSX CAC 40 Nikkei Euro Tadawul DAX Karachi BSE Sensex
100 500 Composite France 225 Stoxx 50 all Share German 100 30
FTSE 100 1.0000
S&P 500 0.5722 1.0000
S&P_TSX 0.2113 0.8207 1.0000
Composite
CAC 40 0.0725 0.6529 0.8708 1.0000
France
Nikkei 225 0.4223 0.9047 0.8292 0.7659 1.0000
Euro Stoxx 0.0336 0.5093 0.8049 0.9450 0.6643 1.0000
50
Tadawul all 0.0574 0.7686 0.7669 0.7150 0.7571 0.5381 1.0000
Share
DAX 0.2660 0.7365 0.8891 0.8853 0.8367 0.9126 0.6177 1.0000
German
Karachi 100 -0.1156 0.0043 0.2981 0.2441 0.1862 0.4105 0.0285 0.4281 1.0000
BSE Sensex 0.3692 0.9293 0.8269 0.7334 0.8891 0.5601 0.8562 0.7108 0.0086 1.0000
30
Table 1: Correlation Matrix for the Ten Indexes

Integration of United States Market with European and Asia Market

From the correlation figures above, the United States index S&P 500 is highly correlated

to the European market and Asia Market since the correlation is higher with the country’s

indexes. For example, there is a higher correlation between S&P 500 with Nikkei 225 (0.9047),

Euro Stoxx 50 (0.5093), Tadawul All Share (0.7686), and DAX German (0.7365). The United

States S&P 500 is also highly correlated with BSE Sensex India (0.923) and S&P_TSX from

Australia. The only index that is not related to S&P 500 and Karachi 100 from Pakistan.

European Market Performance

Three European indexes are analyzed from the analysis above, from France, Germany,

and Combination of Euro Stoxx 50. There is a high correlation between DAX German and CAC

40 France (0.8853), and DAX German and CAC 40 with Euro Stoxx 50, which is 0.9126 and

0.9450, respectively. The European Union is also highly correlated with the Australian stock

market and Japanese stock market since the correlation is above 0.5 for the two countries.

Asian Stock Market Performance

The analysis above considered three Asia stock markets: India, Japan, United Arab

Emirates, and Pakistan. Japan and India’s stock markets are highly correlated since the
 Global Stock Markets Integration 4

correlation between the two counties’ indexes is 0.8891. However, the Japan and UAE stock

market are highly correlated, but both are uncorrelated with the Pakistan stock market since the

correlation between the two countries is 0.1862 and 0.0285, respectively. On the contrary, the

Pakistan stock market is highly correlated with the India Stock market since the correlation

between the two indexes is 0. 8891. The Asian stock market is not as highly correlated as the

European market because most of the countries have different competitive advantages and

different factors influence their stock markets. For example, Japan’s economy depends on

technology and manufacturing while Pakistan and UAE depend on oil prices, while India’s

economy depends on Agriculture.

All Index Correlation Graph

1.2000
1.0000
0.8000
0.6000
0.4000
0.2000
0.0000
0 0 e e 5 50 e an 0 30
-0.2000 10 50 sit nc 22 ar 10
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FT S& om 40 i X ra Se
C C N r o ul DA Ka E
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FTSE 100 S&P 500 S&P_TSX Composite CAC 40 France

Euro Stoxx 50 Tadawul all Share DAX German Karachi 100
BSE Sensex 30 Series10

The chart below shows the Index correlation between January 1, 2016, to January 31,

2021.

Chart 1: Index Correlation Graph

The Return Graph of the Indexes

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Indexes Returns Comparison

18.00%
16.00%
14.00%
12.00%
10.00%
8.00%
6.00%
4.00%
2.00%
0.00%
-2.00%
-4.00%
-6.00%
-8.00%
-10.00%
-12.00%
-14.00%
-16.00%
-18.00%
-20.00%
-22.00%

The chart below indicates the return for the ten indexes from January 1, 2016, to January

31, 2021

Table 2: Indexes Return Graph

From table 2 above, the company return for all the indexes was following the same trend;

the correlation of the performance was evident after Covid-19 was declared a world pandemic in

March and April 2020. The company fast experienced a downward trend due to the panic, which

forced most investors to sell most of their holdings. During the two months, the indexes

experienced volatility in the last five years. Although most indexes followed the same trend,

three indexes had the highest volatility; the indexes include; BSE 30 from India, Nikkei 225

(Japan), and DAX from Germany.

The effect of the Covid-19 on Global Indexes

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Source Google Finance

The chart above indicates how the indexes performed in the last five years and

specifically how the curved was shaped by the Covid-19 pandemic and the vaccine’s

introduction. Before 2020, the world economy was booming, and most of the indexes have

upward trends, but when World Health Organization announced the Covid-19 to be a world

pandemic, all the stock experienced a shock and dropped between March and April. In the

second Quarter of the year, the market recovered and begun to show an upward as a sign of

recovery.

Before the Quarter ended, most of the indexes has resumed their pre-Covid-19

performance. After the First vaccine was approved, the indexes exceeded the pre-Covid19 level.

Compared to that season, the stock’s performance is currently higher and more stable since most

of the companies have adopted measures that ensure they survive the economic crisis.
 Global Stock Markets Integration 7

The table below shows a summary of the Average Returns of the Indexes.

The highest level of return was achieved by CAC 40 FROM France, followed closely by

BSE Sensex from India and Euro Stoxx and Nikkei 225 from Japan come third since they have

the same average monthly return. Karachi was the most affected index by Covid-19 since the

monthly return for the company was negative in the last two years. Also, FTSE 100 performed

poorly in the last two years since its monthly return was negative -0.53%, followed by the UAE

that had an average return of -0.48.

The map below shows how the market

return was distributed across the globe.

 Global Stock Markets Integration 8

References

Borowski, K. (2018). Should investors on equity markets be superstitious? (Example of 7 world

stock index components). International Journal of Economics and Finance, 11(1),

151. https://doi.org/10.5539/ijef.v11n1p151

Ibn-Mohammed, T., Mustapha, K., Godsell, J., Adamu, Z., Babatunde, K., Akintade, D.,

Acquaye, A., Fujii, H., Ndiaye, M., Yamoah, F., & Koh, S. (2021). A critical analysis of

the impacts of COVID-19 on the global economy and ecosystems and opportunities for

circular economy strategies. Resources, Conservation and Recycling, 164,

105169. https://doi.org/10.1016/j.resconrec.2020.105169