The Evolution of Interdependence in World Equity Markets - Evidence from Minimum Spanning Trees
Ricardo Coelho, Claire G. Gilmore, Brian Lucey, Peter Richmond, Stefan Hutzler
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.
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