International stock market cointegration under the risk-neutral measure

This paper investigates international cointegration and financial integration among equity market indexes using index option data, providing an ex-ante analysis through investor anticipations. Daily time series of risk-neutral variance, skewness, and kurtosis are constructed for five major indexes for three sub-periods between 2003 and 2013. Fractionally cointegrated VAR models are estimated at the international level, accounting for persistence in risk-neutral moments. Our results show that there exist international equilibria in risk-neutral moments defined by several cointegrating vectors. During the 2007-2009 global crisis period, these equilibria are characterized by an increase in persistence and in the speeds of adjustment. Moreover, for risk-neutral variance and skewness, all markets are included in the equilibria and none are weakly exogenous. Outside the global crisis period, the cointegration relationship is more fragmented, especially for higher-order moments. In particular, crash and tail risks are segmented during the European debt crisis.