Linkages between the US and European Stock Markets: A Fractional Cointegration Approach

29 Pages Posted: 19 Oct 2015

See all articles by Guglielmo Maria Caporale

Guglielmo Maria Caporale

Brunel University London - Department of Economics and Finance; London South Bank University; CESifo (Center for Economic Studies and Ifo Institute); German Institute for Economic Research (DIW Berlin)

Luis A. Gil-Alana

University of Navarra - Department of Economics

C. Orlando

University of Navarra - School of Economics

Multiple version iconThere are 3 versions of this paper

Date Written: September 24, 2015

Abstract

This paper analyses the long-memory properties of US and European stock indices, as well as their linkages, using fractional integration and fractional cointegration techniques. These methods are more general and have higher power than the standard ones usually employed in the literature. The empirical evidence based on them suggests the presence of unit roots in both the S&P 500 Index and the Euro Stoxx 50 Index. Also, fractional cointegration appears to hold at least for the subsample from December 1996 to March 2009 ending when the global financial crisis was still severe; subsequently, the US and European stock markets diverged and followed different recovery paths, possibly as a result of various factors such as diverging growth and monetary policy. Establishing whether the degree of cointegration has changed over time is important since past literature has shown that diversification benefits arise when markets are not cointegrated.

Keywords: stock markets, linkages, fractional integration, fractional cointegration

JEL Classification: C320, G150

Suggested Citation

Caporale, Guglielmo Maria and Gil-Alana, Luis A. and Orlando, Christopher, Linkages between the US and European Stock Markets: A Fractional Cointegration Approach (September 24, 2015). CESifo Working Paper Series No. 5523, Available at SSRN: https://ssrn.com/abstract=2675997

Guglielmo Maria Caporale (Contact Author)

Brunel University London - Department of Economics and Finance ( email )

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London South Bank University ( email )

Centre for Monetary and Financial Economics
London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

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Munich, DE-81679
Germany

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstra├če 58
Berlin, 10117
Germany

Luis A. Gil-Alana

University of Navarra - Department of Economics ( email )

Campus de Arrosadia
Pamplona, 31006
Spain

Christopher Orlando

University of Navarra - School of Economics ( email )

Universidad de Navarra
Campus Universitario
Pamplona, 31009
Spain

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