The Evolution of Interdependence in World Equity Markets - Evidence from Minimum Spanning Trees

Abstract

The minimum spanning tree is used to study the process of market integration for a large group of national stock market indices. We show how the asset tree evolves over time and describe the dynamics of its normalized length, mean occupation layer, and single- and multiple-step linkage survival rates. Over the period studied, 1997-2006, the tree shows a tendency to become more compact. This implies that global equity markets are increasingly interrelated. The consequence for global investors is a potential reduction of the benefits of international portfolio diversification.