Linkages between the US and European Stock Markets: A Fractional Cointegration Approach

Abstract

This paper analyses the long-memory properties of US and European stock indices, as well as their linkages, using fractional integration and fractional cointegration techniques. These methods are more general and have higher power than the standard ones usually employed in the literature. The empirical evidence based on them suggests the presence of unit roots in both the SP subsequently, the US and European stock markets diverged and followed different recovery paths, possibly as a result of various factors such as diverging growth and monetary policy. Establishing whether the degree of cointegration has changed over time is important since past literature has shown that diversification benefits arise when markets are not cointegrated.