US and European stock market crashes: Any evidence of interdependence?

Abstract

This paper examines the response of Stock Prices (SPs) in Germany, Italy, and the UK to shocks to US Stock Prices (USSPs) using Vector Error Correction Models (VECMs) and cross-country stock return correlations. Our results yield clear implications. Positive shocks to USSPs lead to significant, positive, responses in European SPs. Shocks to US stock prices also explain over 43% of the forecast error variance in European SPs. Shocks to domestic variables never cause significant responses in European SPs. These results indicate strong interdependence between the US stock market and stock markets in the UK, Germany and Italy.