Co-movements between US and UK stock prices: the roles of macroeconomic information and time-series varying conditional correlations
This paper provides evidence on the sources of co-movement in monthly US and UK stock price movements by investigating the role of macroeconomic and financial variables in a bivariate system with time-varying conditional correlations. Crosscountry communality in response is uncovered, with changes in the US Federal Funds rate, UK bond yields and oil prices having similar negative effects in both markets. Other variables also play a role, especially for the UK market. These effects do not, however, explain the marked increase in cross-market correlations observed from around 2000, which we attribute to time variation in the correlations of shocks to these markets. A regime-switching smooth transition model captures this time variation well and shows the correlations increase dramatically around 1999-2000. JEL classifications: C32, C51, G15 Keywords: international stock returns, DCC-GARCH model, smooth transition conditional correlation GARCH model, model evaluation.
|Date of creation:||2008|
|Contact details of provider:|| Postal: Avda. de la Universitat,1 - 43204 Reus (Tarragona)|
Phone: 977 75 98 00
Fax: 977 75 98 10
Web page: http://www.urv.cat
More information through EDIRC
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.:
- Campbell, John Y & Hamao, Yasushi, 1992.
" Predictable Stock Returns in the United States and Japan: A Study of Long-Term Capital Market Integration,"
Journal of Finance,
American Finance Association, vol. 47(1), pages 43-69, March.
- John Y. Campbell & Yasushi Hamao, 1989. "Predictable Stock Returns in the United States and Japan: A Study of Long-Term Capital Market Integration," NBER Working Papers 3191, National Bureau of Economic Research, Inc.
- Hamao, Yasushi & Campbell, John, 1992. "Predictable Stock Returns in the United States and Japan: A Study of Long-Term Capital Market Integration," Scholarly Articles 3207694, Harvard University Department of Economics.
- Andrew Ang & Geert Bekaert, 2002. "International Asset Allocation With Regime Shifts," Review of Financial Studies, Society for Financial Studies, vol. 15(4), pages 1137-1187.
- François Longin, 2001. "Extreme Correlation of International Equity Markets," Journal of Finance, American Finance Association, vol. 56(2), pages 649-676, 04.
- Canova, Fabio & Nicol , Gianni De, 2000. "Stock Returns, Term Structure, Inflation, And Real Activity: An International Perspective," Macroeconomic Dynamics, Cambridge University Press, vol. 4(03), pages 343-372, September.
- Canova, Fabio & de Nicolò, Gianni, 1997. "Stock Returns, Term Structure, Inflation and Real Activity: An International Perspective," CEPR Discussion Papers 1614, C.E.P.R. Discussion Papers.
- Fabio Canova & Gianni de Nicolo, 1997. "Stock returns, term structure, inflation and real activity: An international perspective," Economics Working Papers 203, Department of Economics and Business, Universitat Pompeu Fabra.
- Tse, Y. K., 2000. "A test for constant correlations in a multivariate GARCH model," Journal of Econometrics, Elsevier, vol. 98(1), pages 107-127, September.
- Tom Doan, "undated". "RATS programs to replicate Tse's constant correlation GARCH test results," Statistical Software Components RTZ00161, Boston College Department of Economics.
- Tom Doan, "undated". "TSECCTEST: RATS procedure to perform Tse test for constant correlation in MV-GARCH model," Statistical Software Components RTS00214, Boston College Department of Economics.
- Massimo Guidolin & Allan Timmermann, 2003. "Recursive Modeling of Nonlinear Dynamics in UK Stock Returns," Manchester School, University of Manchester, vol. 71(4), pages 381-395, 07.
- Annastiina Silvennoinen & Timo Teräsvirta, 2005. "Multivariate Autoregressive Conditional Heteroskedasticity with Smooth Transitions in Conditional Correlations," Research Paper Series 168, Quantitative Finance Research Centre, University of Technology, Sydney.
- Silvennoinen, Annastiina & Teräsvirta, Timo, 2005. "Multivariate Autoregressive Conditional Heteroskedasticity with Smooth Transitions in Conditional Correlations," SSE/EFI Working Paper Series in Economics and Finance 577, Stockholm School of Economics, revised 01 Oct 2005.
- Pesaran, M Hashem & Timmermann, Allan, 2000. "A Recursive Modelling Approach to Predicting UK Stock Returns," Economic Journal, Royal Economic Society, vol. 110(460), pages 159-191, January.
- Pesaran, M. H. & Timmermann, A., 1996. "A Recursive Modelling Approach to Predicting UK Stock Returns'," Cambridge Working Papers in Economics 9625, Faculty of Economics, University of Cambridge.
- Allan Timmermann & M. Hashem Pesaran, 1999. "A Recursive Modelling Approach to Predicting UK Stock Returns," FMG Discussion Papers dp322, Financial Markets Group.
- Laopodis, Nikiforos T, 2002. "Volatility Linkages among Interest Rates: Implications for Global Monetary Policy," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 7(3), pages 215-233, July.
- Lorenzo Cappiello & Robert F. Engle & Kevin Sheppard, 2006. "Asymmetric Dynamics in the Correlations of Global Equity and Bond Returns," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 4(4), pages 537-572.
- Cappiello, Lorenzo & Engle, Robert F. & Sheppard, Kevin, 2003. "Asymmetric dynamics in the correlations of global equity and bond returns," Working Paper Series 204, European Central Bank.
- Pesaran, M Hashem & Timmermann, Allan, 1995. " Predictability of Stock Returns: Robustness and Economic Significance," Journal of Finance, American Finance Association, vol. 50(4), pages 1201-1228, September.
- Bonfiglioli, Alessandra & Favero, Carlo A., 2005. "Explaining co-movements between stock markets: The case of US and Germany," Journal of International Money and Finance, Elsevier, vol. 24(8), pages 1299-1316, December.
- William N. Goetzmann & Lingfeng Li & K. Geert Rouwenhorst, 2005. "Long-Term Global Market Correlations," The Journal of Business, University of Chicago Press, vol. 78(1), pages 1-38, January.
- William N. Goetzmann & Lingfeng Li & K. Geert Rouwenhorst, 2001. "Long-Term Global Market Correlations," NBER Working Papers 8612, National Bureau of Economic Research, Inc.
- William Goetzmann & Lingfeng Li & K. Rouwenhorst, 2001. "Long-Term Global Market Correlations," Yale School of Management Working Papers ysm237, Yale School of Management, revised 01 Jan 2008.
- William N.Goetzmann & Lingfeng Li & K.Geert Rouwenhorst, 2003. "Long-Term Global Market Correlations," DNB Staff Reports (discontinued) 98, Netherlands Central Bank.
- Richards, Anthony J., 1995. "Comovements in national stock market returns: Evidence of predictability, but not cointegration," Journal of Monetary Economics, Elsevier, vol. 36(3), pages 631-654, December.
- Anthony J. Richards, 1996. "Comovements in National Stock Market Returns; Evidence of Predictability But Not Cointegration," IMF Working Papers 96/28, International Monetary Fund.
- Fama, Eugene F, 1981. "Stock Returns, Real Activity, Inflation, and Money," American Economic Review, American Economic Association, vol. 71(4), pages 545-565, September.
- Pelletier, Denis, 2006. "Regime switching for dynamic correlations," Journal of Econometrics, Elsevier, vol. 131(1-2), pages 445-473.
- Denis Pelletier, 2004. "Regime Switching for Dynamic Correlations," Econometric Society 2004 North American Summer Meetings 230, Econometric Society.
- Nasseh, Alireza & Strauss, Jack, 2000. "Stock prices and domestic and international macroeconomic activity: a cointegration approach," The Quarterly Review of Economics and Finance, Elsevier, vol. 40(2), pages 229-245.
- Berben, Robert-Paul & Jansen, W. Jos, 2005. "Comovement in international equity markets: A sectoral view," Journal of International Money and Finance, Elsevier, vol. 24(5), pages 832-857, September.
- R-P. Berben & W.J. Jansen, 2001. "Comovement in International Equity Markets: a Sectoral View," MEB Series (discontinued) 2001-11, Netherlands Central Bank, Monetary and Economic Policy Department.
- Robert-Paul Berben & W. Jos Jansen, 2003. "Comovement in international equity markets: A sectoral view," Finance 0310001, EconWPA.
- Ramchand, Latha & Susmel, Raul, 1998. "Volatility and cross correlation across major stock markets," Journal of Empirical Finance, Elsevier, vol. 5(4), pages 397-416, October.
- Sensier, Marianne & Osborn, Denise R & Ocal, Nadir, 2002. " Asymmetric Interest Rate Effects for the UK Real Economy," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 64(4), pages 315-339, September.
- M Sensier & D R Osborn & N Öcal, 2002. "Asymmetric Interest Rate Effects for the UK Real Economy," Centre for Growth and Business Cycle Research Discussion Paper Series 10, Economics, The Univeristy of Manchester.
- Bollerslev, Tim, 1990. "Modelling the Coherence in Short-run Nominal Exchange Rates: A Multivariate Generalized ARCH Model," The Review of Economics and Statistics, MIT Press, vol. 72(3), pages 498-505, August.
- Hamilton, James D. & Susmel, Raul, 1994. "Autoregressive conditional heteroskedasticity and changes in regime," Journal of Econometrics, Elsevier, vol. 64(1-2), pages 307-333.
- Tom Doan, "undated". "RATS programs to estimate Hamilton-Susmel Markov Switching ARCH model," Statistical Software Components RTZ00083, Boston College Department of Economics.
- King, Mervyn & Sentana, Enrique & Wadhwani, Sushil, 1994. "Volatility and Links between National Stock Markets," Econometrica, Econometric Society, vol. 62(4), pages 901-933, July.
- Mervyn King & Enrique Sentana & Sushil Wadhwani, 1990. "Volatiltiy and Links Between National Stock Markets," NBER Working Papers 3357, National Bureau of Economic Research, Inc.
- David McMillan, 2001. "Non-Linear Predictability of Stock Market Returns: Evidence from Non-Parametric and Threshold Models," Discussion Paper Series, Department of Economics 200102, Department of Economics, University of St. Andrews.
- Tse, Y K & Tsui, Albert K C, 2002. "A Multivariate Generalized Autoregressive Conditional Heteroscedasticity Model with Time-Varying Correlations," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(3), pages 351-362, July.
- Engle, Robert, 2002. "Dynamic Conditional Correlation: A Simple Class of Multivariate Generalized Autoregressive Conditional Heteroskedasticity Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(3), pages 339-350, July. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:urv:wpaper:2072/8950. 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: (Ariadna Casals)
If references are entirely missing, you can add them using this form.