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A new approach to analysing comovement in European equity markets

Ramaprasad Bhar (School of Banking and Finance, The University of New South Wales, Sydney, Australia)
Shigeyuki Hamori (Graduate School of Economics, Kobe University, Kobe, Japan)

Studies in Economics and Finance

ISSN: 1086-7376

Article publication date: 7 March 2008

403

Abstract

Purpose

To provide an alternative channel of investigation of comovement in four large European equity markets over a sample period of nearly 30 years.

Design/methodology/approach

The paper adopts a two stage methodological approach. In the first instance, the interaction between the equity market and the industrial production in each of the countries is analysed in a hidden Markov framework. This helps extract the information on expansion and contraction of the economies over the three decades. In the second stage, the inference on probability of expansion and contraction of the economies is used to measure the level concordance between these probability series. This helps deduce the level of comovement between the equity markets.

Findings

Although the nature of interaction between the equity market and the industrial production in these countries are different, the overall comovement in the equity markets is well established.

Originality/value

The paper introduces a new style in the process of investigation with respect to comovement in different markets and illustrates that with an example of four large European markets.

Keywords

Citation

Bhar, R. and Hamori, S. (2008), "A new approach to analysing comovement in European equity markets", Studies in Economics and Finance, Vol. 25 No. 1, pp. 4-20. https://doi.org/10.1108/10867370810857531

Publisher

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Emerald Group Publishing Limited

Copyright © 2008, Emerald Group Publishing Limited

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