Financial market theory of development - Evidence from Palestine and Israeli Stock Exchanges

This study is compelled by the motivation to find out potential equilibrium and dynamic relationships involving two neighboring stock exchanges - palestine stock exchange (pex) and tel aviv stock exchange (tase). based upon financial market theory of development,we attempt to explore the degree of integration between the two exchanges using engle-granger cointegration procedures (1987). data were collected on monthly basis over sample period from january 1998 till february 2012. the empirical results from bivariate error correction model (ecm) reveal a statistically significant long-term relation between the two exchanges. however,the results from granger causality tests indicate absence of short-term relationships between them. to unveil granger causality in a dynamic context,we use out-of-sample testing via impulse-response functions (irf) and variance decompositions (vdc.) interestingly,both tests show that performance of tase does affect its archrival.