Equity Transmission Effects and Autocorrelations across the U.S., the Eurozone and Japan:

Abstract: This paper presents statistically significant and causal trends of increasing transmission effects across equity markets of the world’s three largest economies during the period of 1988 till 2010. When studying daily returns of the S&P 500, EURO STOXX and Nikkei 225 in a round-the-clock setting, increasing transmission effects were detected by our Autoregressive (AR) models and Granger causality tests. We have also observed and confirmed a considerably increasing trend of the Eurozone’s relative influence on its peer markets. The fact that these dominant markets have become more interrelated suggests that portfolio managers obtain lower diversification benefits across the studied markets. The paper does not only examine transmission effects from foreign markets, but also lag effects from the home market. The results obtained from our AR(12) models and Ljung-Box tests implies the presence of slightly negative autocorrelations, possibly suggesting the occurrence of mean reversion within daily stock returns.