On Stock Market Return Co-Movements: Macroeconomic News, Dispersion of Beliefs, and Contagion

57 Pages Posted: 18 Aug 2000

See all articles by Robert A. Connolly

Robert A. Connolly

University of Florida

F. Albert Wang

University of Dayton - School of Business Administration - Department of Economics and Finance

Date Written: June 2000

Abstract

We document and explain the return co-movement for the U.S., U.K., and Japanese equity markets for the period of 1985-1996. Our empirical results show the importance of imperfect signal-extraction in explaining the equity market return co-movement. In such a setting, domestic investors try to extract the unobservable global factors from foreign market returns and use the extracted information in their subsequent domestic trading. In this imperfect learning environment, domestic investors respond to the foreign return signal more strongly if the signal is more precise. In addition, trading noise may also affect the return-generating process in domestic markets. We find this contagion effect is most pronounced in the extreme down markets.

Keywords: Market co-movement, contagion, signal extraction, macroeconomic news, dispersion of beliefs

JEL Classification: G15, F30

Suggested Citation

Connolly, Robert A. and Wang, Fukuo Albert, On Stock Market Return Co-Movements: Macroeconomic News, Dispersion of Beliefs, and Contagion (June 2000). Available at SSRN: https://ssrn.com/abstract=233924 or http://dx.doi.org/10.2139/ssrn.233924

Robert A. Connolly (Contact Author)

University of Florida ( email )

P.O. Box 117168
Gainesville, FL 32611
United States

Fukuo Albert Wang

University of Dayton - School of Business Administration - Department of Economics and Finance ( email )

300 College Park
Dayton, OH 45469
United States
937-229-3095 (Phone)

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