A Dynamic Analysis of S&P 500, FTSE 100 and EURO STOXX 50 Indices Under Different Exchange Rates

PLoS ONE, Volume 13, Issue 3, pp. 1-40 e0194067, March 2018 DOI: 10.1371/journal.pone.0194067

41 Pages Posted: 14 Jul 2017 Last revised: 20 Mar 2018

See all articles by Yanhua Chen

Yanhua Chen

Institute for Risk and Uncertainty, University of Liverpool, UK

Rosario N. Mantegna

University of Palermo

Athanasios A. Pantelous

Monash University - Department of Econometrics & Business Statistics

Konstantin Zuev

California Institute of Technology

Date Written: July 7, 2017

Abstract

The persistence analysis of short- and long-term interaction and causality in the international financial markets is a key issue for policy makers and portfolio investors. This paper assesses the dynamic evolution of short-term correlation, long-term cointegration and Error Correction Model (hereafter referred to as ECM)-based long-term Granger causality between each pair of US, UK, and Eurozone stock markets over the period of 1980--2015 using the rolling-window technique. A comparative analysis of pairwise dynamic integration and causality of stock markets, measured in common and domestic currency terms, is conducted to evaluate comprehensively how exchange rate fluctuations affect the time-varying integration among the S&P 500, FTSE 100 and EURO STOXX 50 indices. The results obtained show that the dynamic correlation, cointegration and ECM-based Granger causality vary significantly over the whole sample period. The degree of dynamic cointegration and correlation between pairs of stock markets rises in periods of high volatility and uncertainty, especially under the influence of external and internal economic, financial and political shocks. Meanwhile, weaker and decreasing cointegration and correlation among the three developed stock markets are observed during the recovery periods. Interestingly, the most persistent and significant cointegration among the three developed stock markets exists during the 2007--09 global financial crisis. Finally, the exchange rate fluctuations, also influence the dynamic correlation, cointegration and ECM-based Granger casual relations between all pairs of stock indices, with that influence increasing as the local currency terms are used.

Keywords: Correlation; Cointegration; ECM-based long-run Granger causality; Crises; Exchange Rates; Uncertainty

JEL Classification: C58; C02; C32; G15; F31

Suggested Citation

Chen, Yanhua and Mantegna, Rosario Nunzio and Pantelous, Athanasios A. and Zuev, Konstantin, A Dynamic Analysis of S&P 500, FTSE 100 and EURO STOXX 50 Indices Under Different Exchange Rates (July 7, 2017). PLoS ONE, Volume 13, Issue 3, pp. 1-40 e0194067, March 2018 DOI: 10.1371/journal.pone.0194067. Available at SSRN: https://ssrn.com/abstract=2998600 or http://dx.doi.org/10.2139/ssrn.2998600

Yanhua Chen

Institute for Risk and Uncertainty, University of Liverpool, UK ( email )

Chatham Street
Liverpool, L69 7ZA
United Kingdom

Rosario Nunzio Mantegna

University of Palermo ( email )

Dipartimento di Fisica e Chimica
Viale delle Scienze, Edificio 18
Palermo, PA I-90128
Italy
+3909123899074 (Phone)
+3909123860815 (Fax)

HOME PAGE: http://www.unipa.it/persone/docenti/m/rosario.mantegna

Athanasios A. Pantelous (Contact Author)

Monash University - Department of Econometrics & Business Statistics ( email )

Wellington Road
Clayton, Victoria 3168
Australia

Konstantin Zuev

California Institute of Technology ( email )

Pasadena, CA 91125
United States

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