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

Abstract

Recently, national economies have become more internationalized because of increased trade and increased cooperation between national governments leading to removal of barriers to free flow of goods and services, and financial, physical and human capital. The relationship between equity markets in various countries has been examined extensively 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 show that the US exerts a significant impact on European markets. Moreover, the three European markets influence each other in the short and long run. Therefore, diversification among these national stock markets will not greatly reduce the portfolio risk without sacrificing the expected return.