Political and Institutional Factors in the Convergence of International Equity Markets

The objective of this study is to re-investigate whether international equity markets have undergone convergence in recent years, and given convergence or non-convergence patterns, what political and institutional factors can explain them. The new methodological approach of panel club convergence and clustering procedure proposed by Phillips and Sul (2007) is employed with several advantages.  First, no specific assumptions concerning the stationarity of the variables of interest and/or the existence of common factors are necessary. Second, this methodology is based on a general form of nonlinear time varying factor models. Third, this approach takes into account the countries’ experience in transitional dynamics, while it abstains from the hypothesis of homogeneous technological progress, an assumption extensively employed in the majority of growth studies. This is crucial, since under technological heterogeneity, the examination of either growth convergence or growth determinants by standard panel stationarity tests is not valid (Phillips and Sul, 2006). Fourth, this study also attempts to explain any convergence or divergence patterns through the convergence of political and institutional variables.