Dynamic Linkages among the Equity Markets of the U.S and the European Countries: Recent Evidence based on Cointegration and Causality Tests

Dynamic Linkages among the Equity Markets of the U.S and the European Countries: Recent Evidence based on Cointegration and Causality Tests

Global Review of Accounting and Finance

Vol. 10. No. 2., September 2019, Pages: 66–86

Dynamic Linkages among the Equity Markets of the U.S and the European Countries: Recent Evidence based on Cointegration and Causality Tests

Mazhar M. Islam

This paper investigates the dynamic linkages among the equity markets of the US (proxied by S&P 500), Germany(proxied by DAX30 , France (proxied by CAC30), UK (proxied by FTSE100) and other 14 other major Eurozone markets ( proxied by STOXX 600) using daily stock series from March 3, 2010 through April 17, 2018. Data are collected from the Bloomberg Database and the econometric models are estimated applying the most recent version of Econometric software (EViews 11). Jarque-Bera statistic shows non-normal distribution of the series. Augmented Dicky Fuller test indicates nonstationarity in level series and stationary in first differenced series. Applying Johansen Cointegration technique the study finds that stock price indices of these countries have long-run (equilibium) relationship. Applying the Granger-causality test, strong unidirectional causality has been detected from the US to 16 European markets except for the UK. No causality has been found from the European markets to the US market, indicating that the US market is the leader and the Euro markets are the followers. This is not surprising given the robust US economic growth during the period of our study A strong unidirectional Granger causality has been detected from Germany to the France market with 1 through 5 days lag. A weak unidirectional Granger causality is found from the UK to other Eurozone markets, and from the French to the UK market. In the case of Europe, Frankfurt stock market strongly affects the Paris bourse as well as other Eurozone markets. This result is also not surprising given the high economic growth rates of Germany and French during the sample period and the unfavorable impact of Britain exit from the European Union (BREXIT).