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Measuring Co-Movements Between US and European Stock Markets

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  • Bonfiglioli, Alessandra
  • Favero, Carlo A

Abstract

In this paper we concentrate on the potential consequences for the European stock market of a correction of the US stock market. We conduct our analysis by explicitly considering the distinction between interdependence and contagion. By considering a Vector Error Correction Model, in which stock returns tend to restore an equilibrium relationship between the forecast earnings yield on common stocks and the yield on bonds, we provide separate answers to the following questions: Is there long-term interdependence between the US and Europe, i.e. does the equilibrium for European shares depend on the equilibrium for US shares? Is there short-term interdependence and contagion between US and European stock markets, i.e. do short-term fluctuations of the US share prices spill over to European share prices and is such co-movement stable in the event of high volatility episodes?

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2517.

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Date of creation: Jul 2000
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Handle: RePEc:cpr:ceprdp:2517

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Keywords: Contagion; Interdependence; Stock Market; Structural Models;

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Cited by:
  1. Favero, Carlo A. & Giavazzi, Francesco, 2002. "Is the international propagation of financial shocks non-linear?: Evidence from the ERM," Journal of International Economics, Elsevier, vol. 57(1), pages 231-246, June.
  2. Claudia M. Buch, 2001. "Cross-Border Banking and Transmission Mechanisms: The Case of Europe," Kiel Working Papers 1063, Kiel Institute for the World Economy.
  3. Billio, Monica & Pelizzon, Loriana, 2003. "Contagion and interdependence in stock markets: Have they been misdiagnosed?," Journal of Economics and Business, Elsevier, vol. 55(5-6), pages 405-426.
  4. Drakos, Konstantinos & Kutan, Ali M., 2001. "Opposites attract: The case of Greek and Turkish financial markets," ZEI Working Papers B 06-2001, ZEI - Center for European Integration Studies, University of Bonn.

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