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The Comovement of US and UK Stock Markets

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  • Tom Engsted
  • Carsten Tanggaard

Abstract

"US and UK stock returns are highly positively correlated over the period 1918-99. Using VAR-based variance decompositions, we investigate the nature of this comovement. Excess return innovations are decomposed into news about future dividends, real interest rates, and excess returns. We find that the latter news component is the most important in explaining stock return volatility in both the USA and the UK and that stock return news is highly correlated across countries. This is evidence against Beltratti and Shiller's (1993) finding that the comovement of US and UK stock markets can be explained in terms of a simple present value model. We interpret the comovement as indicating that equity premia in the two countries are hit by common real shocks". Copyright Blackwell Publishers Ltd, 2004.

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Bibliographic Info

Article provided by European Financial Management Association in its journal European Financial Management.

Volume (Year): 10 (2004)
Issue (Month): 4 ()
Pages: 593-607

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Handle: RePEc:bla:eufman:v:10:y:2004:i:4:p:593-607

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Cited by:
  1. el Alaoui, AbdelKader & Masih, Mansur & Bacha, Obiyathulla & Asutay, Mehmet, 2014. "Leverage, Sensitivity to Market Risk and Contagion: A Multi-Country Analysis for Shari’ah(Islamic) Stock Screening," MPRA Paper 57685, University Library of Munich, Germany.
  2. Engsted, Tom & Pedersen, Thomas Q. & Tanggaard, Carsten, 2012. "Pitfalls in VAR based return decompositions: A clarification," Journal of Banking & Finance, Elsevier, vol. 36(5), pages 1255-1265.
  3. Zied Ftiti & Aviral Tiwari & Amél Belanès & Khaled Guesmi, 2014. "Tests of Financial Market Contagion: Evolutionary Cospectral Analysis V.S. Wavelet Analysis," Working Papers 2014-577, Department of Research, Ipag Business School.
  4. Don Bredin & Stuart Hyde, 2008. "Regime Change and the Role of International Markets on the Stock Returns of Small Open Economies," European Financial Management, European Financial Management Association, European Financial Management Association, vol. 14(2), pages 315-346.
  5. Tom Engsted & Thomas Q. Pedersen, 2008. "Return predictability and intertemporal asset allocation: Evidence from a bias-adjusted VAR model," CREATES Research Papers 2008-27, School of Economics and Management, University of Aarhus.
  6. Gamini Premaratne & Lakshmi Bala, 2004. "Stock Market Volatility: Examining North America, Europe and Asia," Econometric Society 2004 Far Eastern Meetings, Econometric Society 479, Econometric Society.
  7. el Alaoui, AbdelKader & Masih, Mansur & Bacha, Obiyathulla & Asutay, Mehmet, 2014. "Leverage versus volatility: Evidence from the Capital Structure of European Firms," MPRA Paper 57682, University Library of Munich, Germany.
  8. Lieven Baele & Pilar Soriano, 2010. "The determinants of increasing equity market comovement: economic or financial integration?," Review of World Economics (Weltwirtschaftliches Archiv), Springer, Springer, vol. 146(3), pages 573-589, September.
  9. Eleni Constantinou & Avo Kazandjian & Georgios P. Kouretas & Vera Tahmazian, 2008. "Common Stochastic Trends Among The Cyprus Stock Exchange And The Ase, Lse And Nyse," Bulletin of Economic Research, Wiley Blackwell, vol. 60(4), pages 327-349, October.
  10. B Harrison & W Moore, 2010. "Stock Market Co-Movement in the Caribbean," Economic Issues Journal Articles, Economic Issues, Economic Issues, vol. 15(1), pages 1-15, March.
  11. Massimo Guidolin & Stuart Hyde, 2007. "What tames the Celtic tiger? portfolio implications from a multivariate Markov switching model," Working Papers 2006-029, Federal Reserve Bank of St. Louis.
  12. el Alaoui, AbdelKader & Masih, Mansur & Bacha, Obiyathulla & Asutay, Mehmet, 2014. "Leverage, return, volatility and contagion: Evidence from the portfolio framework," MPRA Paper 57726, University Library of Munich, Germany.
  13. Diamandis, Panayiotis F., 2009. "International stock market linkages: Evidence from Latin America," Global Finance Journal, Elsevier, vol. 20(1), pages 13-30.
  14. Tom Engsted & Thomas Q. Pedersen, 2013. "Housing market volatility in the OECD area: Evidence from VAR based return decompositions," CREATES Research Papers 2013-04, School of Economics and Management, University of Aarhus.
  15. Gallegati, Marco, 2012. "A wavelet-based approach to test for financial market contagion," Computational Statistics & Data Analysis, Elsevier, Elsevier, vol. 56(11), pages 3491-3497.

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