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Linkages Between the US and European Stock Markets: A Fractional Cointegration Approach
Author(s) -
Caporale Guglielmo Maria,
GilAlana Luis A.,
Orlando James C.
Publication year - 2016
Publication title -
international journal of finance and economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.505
H-Index - 39
eISSN - 1099-1158
pISSN - 1076-9307
DOI - 10.1002/ijfe.1537
Subject(s) - cointegration , economics , stock (firearms) , diversification (marketing strategy) , index (typography) , econometrics , long memory , stock market index , financial economics , financial crisis , stock market , macroeconomics , volatility (finance) , business , mechanical engineering , paleontology , horse , marketing , world wide web , computer science , engineering , biology
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 Standard and Poor's 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 because past literature has shown that diversification benefits arise when markets are not cointegrated. Copyright © 2015 John Wiley & Sons, Ltd.