Interrelationships Among International Stock Market Indices: Europe, Asia and the Americas

Abstract

In this paper, we investigate the price interdependence between seven international stock markets, namely Irish, UK, Portuguese, US, Brazilian, Japanese and Hong Kong, using a new testing method, based on the wavelet transform to reconstruct the data series, as suggested by Lee (2002). We find evidence of intra-European (Irish, UK and Portuguese) market co-movements with the US market also weakly influencing the Irish market. We also find co-movement between the US and Brazilian markets and similar intra-Asian co-movements (Japanese and Hong Kong). Finally, we conclude that the circle of impact is that of the European markets (Irish, UK and Portuguese) on both American markets (US and Brazilian), with these in turn impacting on the Asian markets (Japanese and Hong Kong) which in turn influence the European markets. In summary, we find evidence for intra-continental relationships and an increase in importance of international spillover effects since the mid 1990's, while the importance of historical transmissions has decreased since the beginning of this century.

Wavelet analysis of stock return energy decomposition and return comovement - a case of some central European and developed European stock markets

“…The finding that raw returns and summed scales 1 and 2 returns are more connected than scale 1 returns was also obtained by [29] and [48]. [29], who studies return spillovers between U.S. and Korean stock markets using lagged returns of the explanatory variable finds significant return spillovers from the U.S. to the Korean stock market.…”

“…Significance of parameter estimates and R 2 for raw return and summed scales 1 and 2 return series were slightly higher than for scale 1 series. [48] find strong co-movements only between pairs of Irish, UK and Portuguese stock market returns. The UK and Irish stock markets were most connected, as R 2 for the raw return series reached 0.32, for scale 1 returns 0.22, and for summed scale 1 and scale 2 returns 0.25.…”

“…we estimate model (1) The strength of comovement is measured by R 2 and the significance of the regression parameter b ( [29], [48]). …”

“…From a portfolio diversification point of view, shortterm investors are more interested in the comovement of stock returns at higher frequencies (short term movements), and longterm investors focus more on the lower frequency comovements. As such, one must resort to frequency domain analysis to obtain insights into comovement at the frequency level ( [29], [35], [43], [48]). In such a context, with both the time horizon of economic decisions and the strength and direction of economic relationships between variables that may differ according to the time scale of the analysis, wavelet analysis may prove to be a useful analytical tool [41].…”

Wavelet Multiscale Analysis for Hedge Funds: Scaling and Strategies

“…These "Small Waves" provide an efficient means of studying the multiresolution properties of a signal, as they can be used to decompose a signal into different time horizons. Wavelet filters have been applied to many different applications such as meterology, image analysis, signal processing and financial time series [8][9][10][11][12][13][14][15][22][23][24].…”