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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.

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  • Tom Engsted & Carsten Tanggaard, 2004. "The Comovement of US and UK Stock Markets," European Financial Management, European Financial Management Association, vol. 10(4), pages 593-607, December.
    • Handle: RePEc:bla:eufman:v:10:y:2004:i:4:p:593-607
    DOI: 10.1111/j.1354-7798.2004.00267.x
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