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Corresponding Author:
Lumengo Bonga-Bonga, Department of Economics and Econometrics, University of Johannesburg, South Africa

Coauthors:
Mathias Mandla Manguzvane, Department of Economics and Econometrics, University of Johannesburg, South Africa

Stock Market Correlation and Geographical Distance: Does the Degree of Economic Integration Matter?

April 15, 2026
JEL classification: C23; F15; G15
Keywords: Gravity Models; Stock Markets; Correlation; Economic Integration

Abstract

This paper contributes to the literature on gravity models by examining how the degree of economic integration influences the impact of geographical proximity on stock market correlations. Specifically, it investigates how economic integration between nations shapes the relationship between geographical proximity and stock market correlations. The study contrasts the European Union (EU) and the North American Free Trade Agreement (NAFTA), two economic blocs with varying levels of integration. Utilising dynamic conditional correlation (DCC) and gravity models, the findings reveal that geographical distance generally reduces stock market correlations within these blocs. This outcome is attributed to foreign investors adjusting their portfolios to leverage potential capital market liberalisation, aiming for higher returns and enhanced investment security in domestic stock markets. These insights are valuable for asset managers and investors, offering guidance on portfolio diversification, risk management, and identifying global investment opportunities amid potential market liberalisation.


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