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The comovement of US and UK stock markets

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  • Engsted, Tom

    ()
    (Department of Finance, Aarhus School of Business)

  • Tanggaard, Carsten

    ()
    (Department of Finance, Aarhus School of Business)

Abstract

US and UK stock returns are highly positively correlated over the period 1918-1999. 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 US 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 stocks.

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Bibliographic Info

Paper provided by University of Aarhus, Aarhus School of Business, Department of Business Studies in its series Finance Working Papers with number 02-1.

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Length: 22 pages
Date of creation: 01 Jan 2002
Date of revision:
Handle: RePEc:hhb:aarfin:2002_001

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Postal: The Aarhus School of Business, Fuglesangs Allé 4, DK-8210 Aarhus V, Denmark
Fax: + 45 86 15 19 43
Web page: http://www.asb.dk/about/departments/bs.aspx
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Related research

Keywords: Comovement of stock returns; Variance decomposition; VAR model; Bias-correction; Bootsimulation;

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Cited by:
  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. B Harrison & W Moore, 2010. "Stock Market Co-Movement in the Caribbean," Economic Issues Journal Articles, Economic Issues, vol. 15(1), pages 1-15, March.
  6. Gamini Premaratne & Lakshmi Bala, 2004. "Stock Market Volatility: Examining North America, Europe and Asia," Econometric Society 2004 Far Eastern Meetings 479, Econometric Society.
  7. 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.
  8. Zied Ftiti & Aviral Tiwari & Amél Belanès, 2014. "Tests of Financial Market Contagion- Evolutionary Cospectral Analysis V.S. Wavelet Analysis," Working Papers 2014-062, Department of Research, Ipag Business School.
  9. Diamandis, Panayiotis F., 2009. "International stock market linkages: Evidence from Latin America," Global Finance Journal, Elsevier, vol. 20(1), pages 13-30.
  10. 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, vol. 14(2), pages 315-346.
  11. Lieven Baele & Pilar Soriano, 2010. "The determinants of increasing equity market comovement: economic or financial integration?," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 146(3), pages 573-589, September.
  12. Gallegati, Marco, 2012. "A wavelet-based approach to test for financial market contagion," Computational Statistics & Data Analysis, Elsevier, vol. 56(11), pages 3491-3497.

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