Stock market correlation and geographical distance: does the degree of economic integration matter?

Bonga-Bonga, Lumengo and Manguzvane, Mathias Mandla (2023): Stock market correlation and geographical distance: does the degree of economic integration matter?

Abstract

This paper investigates the effects of geographical distance on stock market correlations between countries within economic blocs. Specifically, this paper examines whether the degree of economic integration influences the nexus between geographical distance and stock market correlation. As the study compares two economic blocs, the European Union (EU) and the North Atlantic Free Trade Area (NAFTA), it finds that geographical distance negatively affects stock market correlations in the two economic blocs, but that effect is less significant for economic blocs with advanced economic integration. Contrary to past studies, this paper postulates that the negative impact of geographical distance on stock market correlation is a result of portfolio reallocation by foreign investors seeking high yields and safe havens in the local stock market when taking advantage of possible capital market liberalization.

• Item Type: MPRA Paper
• Language: English
• Keywords: stock market correlation; geographical distance; gravity model; economic integration.
• Subjects: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C13 - Estimation: General; F - International Economics > F3 - International Finance > F38 - International Financial Policy: Financial Transactions Tax; Capital Controls; G - Financial Economics > G1 - General Financial Markets

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