Interrelationships among regional stock indices

Abstract

AbstractThis study investigates the short‐run and long‐run relationships among stock indices of the US, Europe, Asia, Latin America, and Eastern Europe–Middle East for the pre‐Asian crisis and for the crisis period. The findings from these two periods are compared and contrasted. No long‐run relationship is observed among these indices during the pre‐Asian crisis period. However, during the crisis period, one significant cointegrating vector is observed and more short‐run (i.e., causal) relations are observed in this period as compared to the pre‐crisis period. Based on the analysis, we infer that during the Asian crisis period, the globalization increased and only the European markets directly effected the US market, while the other regional markets indirectly influenced the US market via the European market. As regards the effect of shocks, we observe that during the pre‐Asian crisis period, the response of all regional markets to shocks in other markets is transitory, whereas during the crisis period, the response of the US stock market is transitory but that of EU market is permanent to all other markets.