AN EMPIRICAL INVESTIGATION OF THE COMOVEMENT BETWEEN STOCK MARKET INDEXES

Abstract

The various stock market indexes are interrelated due to the similar fundamentals which determine the movement in the respective markets. Applying the efficient market hypothesis, an investor should not be able to predict the movement of one index based on the past movement of another index. If the stock markets are efficient, then no long term comovement should exist between stock market indexes. The existence of a long term relation can be tested by use of cointegration tests and common serial correlation feature tests. If no cointegration exists and if no common serial correlation feature exists, then we would not be rejecting efficiency of the stock markets. Using the S&P 500 stock index, the Wilshire 5000 index, and the NASDAQ index, the Hang Seng index, the Footsie index, and the Nikkei index to proxy world stock market indexes, the empirical results of the cointegration and common feature test support the efficiency of the stock markets in most instances. However, the Footsie index consistently demonstrated a relation with the three US stock market indexes included in the study.

Citation

Parker, M.E. and Rapp, T. (1998), "AN EMPIRICAL INVESTIGATION OF THE COMOVEMENT BETWEEN STOCK MARKET INDEXES", Studies in Economics and Finance, Vol. 19 No. 1/2, pp. 108-122. https://doi.org/10.1108/eb028755