Interdependence between International Stock Returns--News or Contagion Effect?
Posted: 2 Sep 1999
Date Written: August 1994
Does the increasing trend of the globalization of equity markets increase price volatility and correlations of international stock returns by propagating a mistake in one market to another market? This paper provides new insights into this issue by examining whether such a transmission of international stock returns has any link to economic news. A one-period model of a competitive security market with heterogeneous information is set up to explain how domestic investors process foreign economic announcements and foreign price changes. The relative importance of U.S. economic announcements and price changes on Japanese stock returns is empirically tested to examine the implications of the model. Empirical results show that U.S. economic announcements-- money supply, wholesale and consumer price indices, and industrial production--have an effect on Japanese stock returns and trading volume. The results suggest that the market perception of Federal Reserves policy is globally communicable across borders.
JEL Classification: G14, G15
Suggested Citation: Suggested Citation