The Comovement of Us and UK Stock Markets

22 Pages Posted: 21 Feb 2002

See all articles by Tom Engsted

Tom Engsted

University of Aarhus - CREATES

Carsten Tanggaard

affiliation not provided to SSRN

Multiple version iconThere are 2 versions of this paper

Date Written: January 2002

Abstract

US and UK stock returns are highly positively correlated over the period 1918-1999. Using VAR-based variance decompositions, we investigate the nature of this comovement. Excess return innovations are decomposed into news about future dividends, real interest rates, and excess returns. We find that the latter news component is the most important in explaining stock return volatility in both the US and the UK and that stock return news is highly correlated across countries. This is evidence against Beltratti and Shiller's (1993) finding that the comovement of US and UK stock markets can be explained in terms of a simple present value model. We interpret the comovement as indicating that equity premia in the two countries are hit by common real shocks.

Keywords: Comovement of stock returns, Variance decomposition, VAR model, Bias-correction, Bootstrap simulation

JEL Classification: C32, G12

Suggested Citation

Engsted, Tom and Tanggaard, Carsten, The Comovement of Us and UK Stock Markets (January 2002). Available at SSRN: https://ssrn.com/abstract=299660 or http://dx.doi.org/10.2139/ssrn.299660

Tom Engsted (Contact Author)

University of Aarhus - CREATES ( email )

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

Carsten Tanggaard

affiliation not provided to SSRN

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