Canto, Beatriu
(2004)
Asymmetries in stock price co-movements.
PhD thesis, London School of Economics and Political Science.
Abstract
It is generally accepted that stock market prices tend to move together. However, very little is known about what factors influence the underlying co-movements between two stock markets. This thesis contributes to the literature by presenting a number of studies exploring different sources of stock market dynamic spillovers. The first part of the thesis presents a theoretical framework to link stock market integration with economic activity. Chapter 2 introduces international equity trading in a stochastic general equilibrium model. We explore the role of international portfolio diversification on transmission of shocks as well as the role of supply shocks in generating international stock returns co-movements. The second part of the thesis empirically investigates stock price co-movements using high frequency data sets. Chapter 3 analyses stock price spillovers between the London and New York equity markets. With multivariate GARCH models for intra-day data, we test the "global factors hypothesis" to assess whether equity market linkages are attributable to reactions of traders to information originating from foreign stock price movements. Chapter 4 explores the role of macroeconomic news as a source of international stock market co-movements using one minute frequency data. We use an unrestricted Vector Autoregressive model with the DAX, the Eurostoxx 50 and the FTSE 100 futures' returns to examine the short-term dynamic spillovers between these markets. In addition, the second part of the chapter analyses how macroeconomic releases affect the cross-country stock prices interactions. Chapter 5 describes a study of non-linear dynamics in stock market co-movements. Arbitrage activity motivates the introduction of a discrete regime-switching specification to model the dynamic relationship between the FTSE 100 cash and futures indices. In our model, arbitrageurs only enter the market if deviations from the theoretical non-arbitrage relationship level are sufficiently large to compensate for the transaction costs.
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