Short- and long-term links among European and US stock markets

Abstract

Recently, national economies are becoming more internationalized because of increased trade and more cooperation between national governments to remove the barriers to free flow of goods, services, and financial, physical and human capital. The relationship between equity markets in various countries have been extensively examined in the literature. This study tests the interdependence between stock prices in Germany, the UK, the Netherlands and the US, using daily closing prices for the period between March 1990 and October 1994. Results of the tests showed that the US exerts a significant impact on the European markets. Moreover, the three European markets influence each other in the short- and long-run. This result implies that these markets move together. Therefore, diversification among those national stock markets will not greatly reduce the portfolio risk without sacrificing expected return.