Do political and economic uncertainties separate stock markets?

This study investigates the dynamic pattern of the interdependence among G7 stock markets over the 1990-2021 period. The state-space formulation of the time-varying cointegrating coefficient allows us to examine the potential drivers of disruption in the long-run bivariate co-movement of markets. Our results reveal that variations in a number of financial risk factors, including economic policy uncertainty (EPU) and world geopolitical risk (GPR), have a significant impact on the cointegrating coefficient. Further analysis on the comovement of the augmented and the non-augmented cointegrating coefficients suggests that globalization has reduced market segmentation causes to our risk factors.