A two-step approach to examine the dynamics of market convergence

We present an improved approach to examine convergence of markets such as those for equity, bonds or commodities. The approach is motivated by Monte Carlo simulations and consists of two steps. First, we test for regime-shifts in the cointegration paths and cointegration with structural breaks. If equilibrium errors are stationary, we then obtain the degree of convergence by rolling speeds of adjustment in a vector error correction model. Our approach is illustrated by an application on stock market convergence.