Testing for Cointegration of the Portuguese Stock Market in the Context of Europe and US

This paper analyses the co-movements between the Portuguese stock market and four major stock markets from Europe and US, employing cointegration techniques based on a VAR model. More specifically, we use a bivariate VAR model converted to a VECM format, in order to test for cointegration, weak exogeneity and proportionality. We found that the stock price series used in our study are all pairwise cointegrated. With the introduction of Euro in 1999 there is evidence of a relatively weaker cointegration between the Portuguese and the US stock markets. The same however is not true with respect to the European markets. For the weak exogeneity results, we 49 found evidence that the Portuguese stock market has been driven by the others major stock markets. For the results on proportionality we found no evidence of proportionality among our series. The results seem to be consistent with the idea that there are no gains to the Portuguese investors from portfolio diversification in the four countries (France, Germany, UK and US) compared two by two.