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Free Trade Agreements and Equity Market Integration: A Case of U.S. and Jordan

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  1. Review of the Related Literature
  2. Econometric Methodology
  3. Data
  4. Empirical Results

Considering the degree of openness in trade and investment, it is a well accepted fact that the international financial markets have increased their mutual dependency on each other. When laying out plans and taking decisions, traders are cautious. Therefore, traders incorporate information pertaining to price fluctuations and volatility in the assets they are trading including information about related assets. The movement of markets in the rhythm and chorus pattern could nullify much of the gain received through diversification across borders. This process of nullification can occur despite the vulnerability in the uncertain global capital market (Obstfeld, 1992, 1994; and Lewis 1996). As a consequence, clear comprehension of the nature of stock markets, its linkage and interaction is now an essential consideration for investors and policy makers. Thus, increased knowledge of how markets influence one another is a significant factor in the determination of pricing, hedging and regulatory policies. In recent years, globalization of capital flows has led to growing relevance of emerging capital markets. To consider an example is the country Jordan. Jordan is one of the countries with an expanding stock market that is increasingly attracting international funds.

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