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Long-Term Trends and Short-Run Dynamics in International Stock Markets

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  • Harissis H.
  • Mesomeris S.
  • Staikouras S.

Abstract

The objective of the present study is to examine the behaviour and interaction of international stock markets. The validity of an earnings based valuation model is assessed using data from seventeen developed countries around the world over the last sixteen years. The estimation process employed involves a two–step Engel–Granger procedure where cointegrating relationships between market indices and their fundamentals are analysed. Cointegration appears mainly in large markets, while the presence of an error correction representation implies the existence of the reversion force towards the fair value obtained from the cointegrating regression. Further, the error correction model, enriched with other variables identified in previous research, seems to capture the short–run dynamics quite well. The coefficients of the variables in both the cointegrating regression and the error correction representation have the correct signs and are consistent in size. Granger causality tests do not particularly support the hypothesis that smaller markets are being influenced by external factors, since causality seems to run both from large to small markets and vice versa.

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Bibliographic Info

Article provided by European Research Studies Journal in its journal European Research Studies Journal.

Volume (Year): IV (2001)
Issue (Month): 3-4 (July - December)
Pages: 103-120

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Handle: RePEc:ers:journl:v:iv:y:2001:i:3-4:p:103-120

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Related research

Keywords: International markets; Market indices; Cointegration; Error correction model; Short–run dynamics; Causality.;

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  1. John Y. Campbell & Robert J. Shiller, 1986. "Cointegration and Tests of Present Value Models," Cowles Foundation Discussion Papers 785, Cowles Foundation for Research in Economics, Yale University.
  2. Kasa, Kenneth, 1992. "Common stochastic trends in international stock markets," Journal of Monetary Economics, Elsevier, vol. 29(1), pages 95-124, February.
  3. Shiller, Robert J, 1981. "Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends?," American Economic Review, American Economic Association, vol. 71(3), pages 421-36, June.
  4. Yourougou, Pierre, 1990. "Interest-rate risk and the pricing of depository financial intermediary common stock : Empirical evidence," Journal of Banking & Finance, Elsevier, vol. 14(4), pages 803-820, October.
  5. Salmon, Mark H, 1982. "Error Correction Mechanisms," Economic Journal, Royal Economic Society, vol. 92(367), pages 615-29, September.
  6. Beveridge, Stephen & Nelson, Charles R., 1981. "A new approach to decomposition of economic time series into permanent and transitory components with particular attention to measurement of the `business cycle'," Journal of Monetary Economics, Elsevier, vol. 7(2), pages 151-174.
  7. Granger, Clive W J, 1986. "Developments in the Study of Cointegrated Economic Variables," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 48(3), pages 213-28, August.
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