||Financial market Integration refers to the trend of financial activities between countries that has influenced mutual financial flows. Financial market integration also reduces the diversification benefits of international investment portfolios and the global financial integration and frictionless international capital movement often affect the specific policy objectives of each country. Therefore, global market financial integration has received attention from policymakers and investors. Based on Billio et al. (2017), this study aims to explore whether Taiwan has become global market financial integrated , by means of comparing the existence of cointegration between Taiwan stock market and those of developed countries.|
There is still no consistent conclusion whether the Taiwan stock market has reached cointegration with other stock markets from developed countries. In this study, the Fourier function with single equation model is adopted as a research method— the cointegration in models with Fourier-form break to rationalize the unknown structural break by Lee (2017). It solves the problem of structural break by Engle and Granger (1987), where the traditional cointegration may have type I error. It also solves the proposed the structural break timing in cointegration by Gregory and Hansen (1996) ,which based on the occurrence of the event or the test statistics. It improves the complexity by using dummy variable to capture structural breaks.
In this study, Taiwan stocks are dependent variable and the world's major stock markets are independent variable. Monthly statistics is adopted from January 2001 to March 2018 to compare Taiwan stock market with the world's major stock markets. The comparisons are divided into four groups: 1. TW vs. US, GB, DE. 2. TW vs. US, JP, GB 3. TW vs. US 4. TW vs.CN.
The results shows no cointegration in Taiwan stocks both in traditional models and Fourier transformation. However, when Fourier transformation is applied, the first three groups showed cointegration. It is a conclusive proof that Taiwan can be a financial integration. Moreover, Taiwan stocks and China's stock market do not have a cointegration relationship, which means they’re not financial integrated. The results are consistent with the current economy and the open door policy of various countries.