A Common Factor Analysis for the US and the German Stock Markets During Overlapping Trading Hours

22 Pages Posted: 13 Aug 2007

See all articles by Michael Flad

Michael Flad

Goethe University Frankfurt - Department of Finance

Robert Jung

University of Hohenheim - Institute of Economics

Abstract

We employ a bivariate common factor model to establish a permanent-transitory decomposition of two major stock indices (the Deutsche Aktienindex (DAX) for Germany and the Dow Jones Industrial Average (DJIA) for the United States). Using high-frequency data, we (1) identify a common trend shared by both indices, (2) find that the DJIA contributes up to 95% to the total innovation of the common factor, (3) show that both markets adjust within minutes to a system-wide shock, and (4) verify by hypothesis testing that the DJIA is the driving force in the transatlantic system of stock indices.

Keywords: Stock market cointegration, High-frequency data, Permanent-transitory decomposition

JEL Classification: C32, G15

Suggested Citation

Flad, Michael and Jung, Robert C., A Common Factor Analysis for the US and the German Stock Markets During Overlapping Trading Hours. Journal of International Financial Markets, Institutions and Money, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1005842

Michael Flad (Contact Author)

Goethe University Frankfurt - Department of Finance ( email )

Germany

Robert C. Jung

University of Hohenheim - Institute of Economics ( email )

Schloss-Mittelhof (Ost)
70593 Stuttgart
Germany

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