Title: A Dynamic Analysis of S&P 500, FTSE 100, and EURO STOXX 50 Indices: Exchange Rates, Cointegration, and Causality
Abstract:
In the world of international financial markets, understanding the interplay between short-term and long-term interactions and causality is paramount for both policymakers and portfolio investors. This article delves into the dynamic evolution of short-term correlations, long-term cointegration, and Error Correction Models (ECM)-based long-term Granger causality among the US, UK, and Eurozone stock markets from 1980 to 2015. Using the rolling-window technique, we perform a comparative analysis to evaluate the impact of exchange rate fluctuations on the time-varying integration among the S&P 500, FTSE 100, and EURO STOXX 50 indices.
Introduction:
The international financial markets have witnessed a roller-coaster ride over the years, marked by periods of volatility, uncertainty, and economic shocks. In this dynamic landscape, the dynamics of short-term correlation, long-term cointegration, and causality among stock markets are of utmost significance. This study, conducted by Yanhua Chen, Rosario N. Mantegna, Athanasios A. Pantelous, and Konstantin Zuev, takes us on a journey through the intricacies of these dynamics, shedding light on how exchange rate fluctuations influence the integration among the S&P 500, FTSE 100, and EURO STOXX 50 indices.
Dynamic Correlation Among Stock Markets:
One of the primary focuses of this research is the examination of dynamic correlation among the US, UK, and Eurozone stock markets. The results reveal a fascinating pattern: dynamic correlation tends to rise during periods of high volatility and uncertainty. This increase is especially pronounced when external and internal economic, financial, and political shocks come into play. However, during recovery periods, the correlation weakens and decreases. It is crucial to note that the most persistent and significant cointegration among these stock markets was observed during the global financial crisis of 2007-09.
Long-Term Cointegration and Error Correction Models:
This study doesn't stop at dynamic correlation. It delves deeper into long-term cointegration and Error Correction Models (ECMs). Cointegration is a critical concept, as it indicates the presence of a stable long-term relationship between stock markets. The results of this research show that the degree of dynamic cointegration and correlation between these stock markets varies significantly throughout the sample period, reflecting the ever-changing dynamics of the financial world.
Granger Causality and Its Implications:
Granger causality analysis plays a pivotal role in understanding how one stock market influences another. This research employs ECM-based Granger causality to unveil the causal relations between the S&P 500, FTSE 100, and EURO STOXX 50 indices. The findings demonstrate that these causal relations fluctuate with changing economic and financial conditions. Notably, exchange rate fluctuations also have a significant impact on these causal relations, particularly when local currency terms are considered.
Influence of Exchange Rate Fluctuations:
The influence of exchange rate fluctuations cannot be understated. This study underscores how currency exchange rate fluctuations affect the dynamic correlation, cointegration, and ECM-based Granger causal relations among stock indices. As local currency terms are used, this influence becomes more pronounced, making it a crucial variable to consider for investors and policymakers.
Conclusion:
In a world characterized by economic uncertainties, financial crises, and global interconnectedness, the dynamic analysis of S&P 500, FTSE 100, and EURO STOXX 50 indices presented in this research is a valuable resource. It provides insights into the ever-changing landscape of international financial markets, offering a deeper understanding of how these markets interact and influence each other. The implications of exchange rate fluctuations on these dynamics serve as a reminder that the global economy is a complex and interconnected web, where every thread, no matter how subtle, can make a significant impact.
Keywords: Correlation, Cointegration, ECM-based long-run Granger causality, Crises, Exchange Rates, Uncertainty
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