IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this article

International nonlinear causality between stock markets

  • Michel Beine
  • Gunther Capelle-Blancard
  • Helene Raymond

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.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.tandfonline.com/doi/abs/10.1080/13518470802042112
Download Restriction: Access to full text is restricted to subscribers.

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

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

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

as
in new window

Handle: RePEc:taf:eurjfi:v:14:y:2008:i:8:p:663-686
Contact details of provider: Web page: http://www.tandfonline.com/REJF20

Order Information: Web: http://www.tandfonline.com/pricing/journal/REJF20

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Graciela L. Kaminsky & Carmen M. Reinhart, 2001. "Financial Markets in Times of Stress," NBER Working Papers 8569, National Bureau of Economic Research, Inc.
  2. Bracker, Kevin & Docking, Diane Scott & Koch, Paul D., 1999. "Economic determinants of evolution in international stock market integration," Journal of Empirical Finance, Elsevier, vol. 6(1), pages 1-27, January.
  3. King, Mervyn A & Wadhwani, Sushil, 1990. "Transmission of Volatility between Stock Markets," Review of Financial Studies, Society for Financial Studies, vol. 3(1), pages 5-33.
  4. Albert S. Kyle, 2001. "Contagion as a Wealth Effect," Journal of Finance, American Finance Association, vol. 56(4), pages 1401-1440, 08.
  5. Robin Brooks & Marco Del Negro, 2002. "The rise in comovement across national stock markets: market integration or IT bubble?," FRB Atlanta Working Paper 2002-17, Federal Reserve Bank of Atlanta.
  6. 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.
  7. G. Andrew Karoly & Rene Stulz, . "Why do Markets Move Together? An Investigation of U.S.-Japan Stock Return Comovements," Research in Financial Economics 9603, Ohio State University.
  8. Kristin Forbes & Roberto Rigobon, 1999. "No Contagion, Only Interdependence: Measuring Stock Market Co-movements," NBER Working Papers 7267, National Bureau of Economic Research, Inc.
  9. Connolly, Robert A. & Wang, F. Albert, 2003. "International equity market comovements: Economic fundamentals or contagion?," Pacific-Basin Finance Journal, Elsevier, vol. 11(1), pages 23-43, January.
  10. Roberto Rigobón & Kristin Forbes, 2001. "Contagion in Latin America: Definitions, Measurement, and Policy Implications," ECONOMIA JOURNAL OF THE LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION, ECONOMIA JOURNAL OF THE LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION, vol. 0(Spring 20), pages 1-46, January.
  11. Grubel, Herbert G & Fadner, Kenneth, 1971. "The Interdependence of International Equity Markets," Journal of Finance, American Finance Association, vol. 26(1), pages 89-94, March.
  12. Phillips, P C B, 1987. "Time Series Regression with a Unit Root," Econometrica, Econometric Society, vol. 55(2), pages 277-301, March.
  13. Froot, Kenneth A. & Donohue, Jessica Tjornhom, 2004. "Decomposing the persistence of international equity flows," Finance Research Letters, Elsevier, vol. 1(3), pages 154-170, September.
  14. Bertero, Elisabetta & Mayer, Colin, 1989. "Structure and Performance: Global Interdependence of Stock Markets Around the Crash of October 1987," CEPR Discussion Papers 307, C.E.P.R. Discussion Papers.
  15. Sims, Christopher A, 1972. "Money, Income, and Causality," American Economic Review, American Economic Association, vol. 62(4), pages 540-52, September.
  16. Becker, Kent G. & Finnerty, Joseph E. & Friedman, Joseph, 1995. "Economic news and equity market linkages between the U.S. and U.K," Journal of Banking & Finance, Elsevier, vol. 19(7), pages 1191-1210, October.
  17. Chung, Pin J. & Liu, Donald J., 1994. "Common stochastic trends in pacific rim stock markets," The Quarterly Review of Economics and Finance, Elsevier, vol. 34(3), pages 241-259.
  18. Malliaris, A. G. & Urrutia, Jorge L., 1992. "The International Crash of October 1987: Causality Tests," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 27(03), pages 353-364, September.
  19. Ripley, Duncan M, 1973. "Systematic Elements in the Linkage of National Stock Market Indices," The Review of Economics and Statistics, MIT Press, vol. 55(3), pages 356-61, August.
  20. Longin, Francois & Solnik, Bruno, 1995. "Is the correlation in international equity returns constant: 1960-1990?," Journal of International Money and Finance, Elsevier, vol. 14(1), pages 3-26, February.
  21. Chung, Heetaik & Lee, Bong-Soo, 1998. "Fundamental and nonfundamental components in stock prices of Pacific-Rim countries," Pacific-Basin Finance Journal, Elsevier, vol. 6(3-4), pages 321-346, August.
  22. Agmon, Tamir, 1972. "The Relations Among Equity Markets: A Study of Share Price Co-Movements in the United States, United Kingdom, Germany and Japan," Journal of Finance, American Finance Association, vol. 27(4), pages 839-55, September.
  23. Hiemstra, Craig & Jones, Jonathan D, 1994. " Testing for Linear and Nonlinear Granger Causality in the Stock Price-Volume Relation," Journal of Finance, American Finance Association, vol. 49(5), pages 1639-64, December.
  24. Panton, Don B. & Lessig, V. Parker & Joy, O. Maurice, 1976. "Comovement of International Equity Markets: A Taxonomic Approach," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 11(03), pages 415-432, September.
  25. De Santis, Giorgio & Gerard, Bruno, 1997. " International Asset Pricing and Portfolio Diversification with Time-Varying Risk," Journal of Finance, American Finance Association, vol. 52(5), pages 1881-1912, December.
  26. Baeck, E.G. & Brock, W.A., 1992. "A Nonparametric Test for Independence of a Multivariate Time Series," Working papers 9204, Wisconsin Madison - Social Systems.
  27. Lee, Bong-Soo, 1998. "Permanent, Temporary, and Non-Fundamental Components of Stock Prices," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 33(01), pages 1-32, March.
  28. Hsieh, David A, 1991. " Chaos and Nonlinear Dynamics: Application to Financial Markets," Journal of Finance, American Finance Association, vol. 46(5), pages 1839-77, December.
  29. John Ammer & Jianping Mei, 1993. "Measuring international economic linkages with stock market data," International Finance Discussion Papers 449, Board of Governors of the Federal Reserve System (U.S.).
  30. Rodrigo O. Valdes & Leonardo Hernández, 2001. "What Drives Contagion; Trade Neighborhood, or Financial Links?," IMF Working Papers 01/29, International Monetary Fund.
  31. Masih, Rumi & Masih, Abul M. M., 2001. "Long and short term dynamic causal transmission amongst international stock markets," Journal of International Money and Finance, Elsevier, vol. 20(4), pages 563-587, August.
  32. Arshanapalli, Bala & Doukas, John, 1993. "International stock market linkages: Evidence from the pre- and post-October 1987 period," Journal of Banking & Finance, Elsevier, vol. 17(1), pages 193-208, February.
  33. François Longin, 2001. "Extreme Correlation of International Equity Markets," Journal of Finance, American Finance Association, vol. 56(2), pages 649-676, 04.
  34. Kasa, Kenneth, 1992. "Common stochastic trends in international stock markets," Journal of Monetary Economics, Elsevier, vol. 29(1), pages 95-124, February.
  35. Masih, A. Mansur M. & Masih, Rumi, 2002. "Propagative causal price transmission among international stock markets: evidence from the pre- and postglobalization period," Global Finance Journal, Elsevier, vol. 13(1), pages 63-91.
  36. Ng, Angela, 2000. "Volatility spillover effects from Japan and the US to the Pacific-Basin," Journal of International Money and Finance, Elsevier, vol. 19(2), pages 207-233, April.
  37. Eun, Cheol S. & Shim, Sangdal, 1989. "International Transmission of Stock Market Movements," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 24(02), pages 241-256, June.
  38. Robin Brooks & Marco Del Negro, 2002. "The Rise in Comovement Across National Stock Markets; Market Integration or Global Bubble?," IMF Working Papers 02/147, International Monetary Fund.
  39. Ang, Andrew & Chen, Joseph, 2002. "Asymmetric correlations of equity portfolios," Journal of Financial Economics, Elsevier, vol. 63(3), pages 443-494, March.
  40. Avouyi-Dovi, S. & Guégan, D. & Ladoucette, S., 2002. "What is the Best Approach to Measure the Interdependence between Different Markets?," Working papers 95, Banque de France.
  41. Hirayama, Kenjiro & Tsutsui, Yoshiro, 1998. "Threshold effect in international linkage of stock prices," Japan and the World Economy, Elsevier, vol. 10(4), pages 441-453, October.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:taf:eurjfi:v:14:y:2008:i:8:p:663-686. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Michael McNulty)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.