Measuring International Economic Linkages with Stock Market Data

Posted: 3 Oct 1994

See all articles by John Ammer

John Ammer

U.S. Federal Reserve Board of Governors

Jianping Mei

New York University (NYU) - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: August 1994

Abstract

We decompose domestic and foreign equity return innovations into components associated with news about dividend growth, interest rates, exchange rates, and future equity risk premiums. This decomposition enables us to determine the extent to which common real and financial shocks contribute to covariation between the returns on different national stock markets. An application to U.S. and U.K. data from 1957 to 1989 reveals substantial degrees of both real and financial integration between the two economies. Although common news about future risk premiums accounts for the bulk of the covariance between the two country's stock markets, the dividend growth components of the two returns are also highly correlated. Both real and financial linkages are found to be greater after the Bretton Woods currency arrangement was abandoned in the early 1970's. In a further application of our methodology to data from 15 countries from 1974 to 1990, we find that both real and financial integration typically contribute to the (consistently positive) correlations between the returns on national stock markets. In most cases, news about future dividend growth in two countries is more highly correlated than contemporaneous output measures. This suggests that there are lags in the international transmission of real economic shocks.

JEL Classification: F36, G15

Suggested Citation

Ammer, John Matthew and Mei, Jianping, Measuring International Economic Linkages with Stock Market Data (August 1994). Available at SSRN: https://ssrn.com/abstract=5564

John Matthew Ammer (Contact Author)

U.S. Federal Reserve Board of Governors ( email )

20th & C Streets NW
Washington, DC 20551
United States
202-452-2349 (Phone)
202-452-6424 (Fax)

Jianping Mei

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0354 (Phone)
212-995-4221 (Fax)

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