Free Trade Agreements and Equity Market Integration: A Case of U.S. and Jordan

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Considering the degree of openness in trade and investment, it is a well accepted fact that the international financial markets have increased their mutual dependency on each other. When laying out plans and taking decisions, traders are cautious. Therefore, traders incorporate information pertaining to price fluctuations and volatility in the assets they are trading including information about related assets. The movement of markets in the rhythm and chorus pattern could nullify much of the gain received through diversification across borders. This process of nullification can occur despite the vulnerability in the uncertain global capital market (Obstfeld, 1992, 1994; and Lewis 1996). As a consequence, clear comprehension of the nature of stock markets, its linkage and interaction is now an essential consideration for investors and policy makers. Thus, increased knowledge of how markets influence one another is a significant factor in the determination of pricing, hedging and regulatory policies. In recent years, globalization of capital flows has led to growing relevance of emerging capital markets. To consider an example is the country Jordan. Jordan is one of the countries with an expanding stock market that is increasingly attracting international funds.

Extraits

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[...] element-by-element multiplication). The matrix is given by for . In the estimation procedure are replaced with sample analogues and . A sufficient through not strictly necessary condition for to be positive definite is that is positive definite. Four special cases of the above model exist. These models can be retrieved by imposing restrictions on the parameter matrices in see also Engle (2002) and Cappiello et al. (2003). For the ease of discussion we will give the restrictions on for each of the models in the following way for : - Model the standard DCC model. [...]

[...] To examine the properties of the innovations, we standardized the residuals by the favored GARCH model. While the residuals standardized by their estimated standard deviation are both less skewed and less fat-tailed, the standardized residuals are highly non- normal. In fact, the both equity index return series, even when standardized by an estimated conditional standard deviation, reject normality using a Jarque-Bera test at the level. The unconditional correlations between the two equity index return series are also in Panel B of Table 1. [...]

[...] we tested for both a structure break in the mean and a structural break in both the mean and the dynamic. The log-likelihood ratios rejected the null hypothesis of no structural break in the mean 326.1428 Furthermore, we found evidence for both a break in the mean and the dynamics 825.2778 Therefore, the remainder of the paper will present the DCC model with a break in the mean and in the dynamics. While each of the volatility series was assumed to evolve independently of the other series, the model allows us to examine the volatility linkages between the two markets. [...]