Free trade agreements and equity market integration: the case of the US and Jordan

Abstract

This study is aimed mainly to examine the impact of the US-Jordan Free Trade Agreement (UJFTA) on the degree of equity market's linkage. This issue is carried out through an asymmetric version of the Dynamic Conditional Correlation (DCC) model of Engle (2002) and developed by Sheppard (2002), which allows for asymmetries in both volatilities and conditional correlations. The empirical evidence suggests that the UJFTA has indeed increased substantially and significantly the linkages of the Jordanian capital market with the US equity markets. These results strongly support the argument that the direct trade flows is one of the most important determinant of cross-country linkages in equity markets.