A new approach to analysing comovement in European equity markets

Abstract

PurposeTo provide an alternative channel of investigation of comovement in four large European equity markets over a sample period of nearly 30 years.Design/methodology/approachThe 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.FindingsAlthough 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/valueThe 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.