Measuring International Economic Linkages with Stock Market Data

Abstract

This article develops a new framework for measuring financial and real economic linkages between countries. Using United States and United Kingdom data from 1957 to 1989, we find closer financial linkages after the Bretton Woods currency arrangement was abandoned and Britain suspended exchange controls. In a pairwise application to fifteen countries over a shorter period, we also find that news about future dividend growth is more highly correlated between countries than contemporaneous output measures. This suggests that there are lags in the international transmission of economic shocks and that contemporaneous output correlation may understate the magnitude of integration.

Are Correlations of Stock Returns Justified by Subsequent Changes in National Outputs?

“…Consistent with the observations in Ammer and Mei (1996), the correlations of stock returns, in Figure 1, are always higher than the correlations of industrial productions. Our research has a simple goal.…”

“…A purely financial approach of stock returns correlations has been proposed by Ammer and Mei (1996) and Campbell and Mei (1993). They decompose the innovations in stock returns into three or four components: news about future dividends, interest rates, possibly news about exchange rates and news about future excess returns, the latter being calculated as a residual only, as opposed to being determined by a dynamic pricing model.…”

Housing market volatility in the OECD area: Evidence from VAR based return decompositions

“…is a constant slightly less than one, and c is a linearization constant. The log-linear Campbell-Shiller relation only holds approximately, but Engsted, Pedersen, and Tanggaard (2012b) show that it is highly accurate, so in the rest of the paper we replace with = in (1). (See also footnote 3).…”

In search of the determinants of European asset market comovements

“…They …nd that the discount rate has opposite e¤ects on stocks and bonds. Ammer and Mei (1996) add a foreign stock return to the model and characterize the covariance between international stocks. In their application, they …nd that the covariance between national indices is driven by a common stock risk premia rather than by the comovement in fundamental variables.…”