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International nonlinear causality between stock markets

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  • Michel Beine
  • Gunther Capelle-Blancard
  • Helene Raymond

Abstract

In this paper, we test for linear and nonlinear Granger causality between the French, German, Japanese, UK and US daily stock index returns from 1973 to 2003. We find a strong contemporaneous linear dependence between European countries and a directional linear dependence from the US towards the other markets. Besides, linear causality increases after 1987, a finding consistent with the expected effects of financial liberalization of the 1980s and the 1990s. Above all, we document the presence of bidirectional nonlinear causality between daily returns. To check for spurious nonlinear causality, we filter out heteroskedasticity using a FIGARCH model. The dramatic decrease in the number of significant nonlinear causality lags confirms that heteroskedasticity played a major part in the previous findings. We then check if a few structural breaks can explain the remaining nonlinear causality. We find that a large number of nonlinear relationships vanish when we control for structural breaks, whereas linear causality remains.

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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal The European Journal of Finance.

Volume (Year): 14 (2008)
Issue (Month): 8 ()
Pages: 663-686

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Handle: RePEc:taf:eurjfi:v:14:y:2008:i:8:p:663-686

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Related research

Keywords: international co-movements; linear and nonlinear causality; FIGARCH; multiple structural breaks; financial integration;

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Cited by:
  1. Aloui, Riadh & Aïssa, Mohamed Safouane Ben & Nguyen, Duc Khuong, 2011. "Global financial crisis, extreme interdependences, and contagion effects: The role of economic structure?," Journal of Banking & Finance, Elsevier, vol. 35(1), pages 130-141, January.
  2. Menezes, Rui & Dionísio, Andreia & Hassani, Hossein, 2012. "On the globalization of stock markets: An application of Vector Error Correction Model, Mutual Information and Singular Spectrum Analysis to the G7 countries," The Quarterly Review of Economics and Finance, Elsevier, vol. 52(4), pages 369-384.
  3. Grammatikos, Theoharry & Vermeulen, Robert, 2012. "Transmission of the financial and sovereign debt crises to the EMU: Stock prices, CDS spreads and exchange rates," Journal of International Money and Finance, Elsevier, vol. 31(3), pages 517-533.
  4. Rui Menezes & Andreia Dioniso, 2011. "Globalization and long-run co-movements in the stock market for the G7: an application of VECM under structural breaks," Papers 1101.4093, arXiv.org.
  5. Leonidas Sandoval Junior, 2011. "Pruning a Minimum Spanning Tree," Papers 1109.0642, arXiv.org.
  6. Sandoval, Leonidas, 2012. "Pruning a minimum spanning tree," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 391(8), pages 2678-2711.
  7. Aymen Belgacem & Amine Lahiani, 2012. "More on the impact of US macroeconomic announcements: Evidence from French and German stock markets' volatility," Economics Bulletin, AccessEcon, vol. 32(2), pages 1509-1526.
  8. Chiu-Lan Chang & Paul L. Hsueh, 2013. "An Investigation of the Flight-to-Quality Effect: Evidence from Asia-Pacific Countries," Emerging Markets Finance and Trade, M.E. Sharpe, Inc., vol. 49(S4), pages 53-69, September.

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