A study on comovements across national stock markets in Asia, Europe and U.S.

Abstract

In old days, empirical results showed consistently low degree of correlation in returns across global stock markets. Interestingly, the correlation coefficients of returns across national stock market have been increasing lately with two reasons. Firstly, investors across the world tend to include foreign stocks in their portfolio holdings in pursuit of raising return and reducing risk. Governments opening up its domestic stock market to the globe with lesser restrictions are in support of this trend. Secondly, firms are becoming more globalized in terms of its sales, manufacturing and financing. Hence global firms and its stock price are more exposed to the global business cycle, causing national stock markets to move together.

The purpose of this paper is to observe the degree of influence that a stock market of one nation has on that of the other, and to reveal the existence of comovement across national stock markets. An appropriate stock market index is to be chosen to describe the fluctuation of a stock market. Such indices will be compared with one another with regression analysis, in pursuit of observing the comovement across national stock markets. Regression analysis is applied to measure the influence between stock markets. Correlation analysis is used to examine the existence of comovement across national stock markets. The thesis also strives to answer whether the synchronization of global stock markets is a permanent phenomenon driven by fundamentals or a temporary one.

The thesis demonstrates that U.S. stock market has a significant influence on Asian stock markets, an Asian stock market has a significant influence on European stock markets and that European stock market has a significant impact on U.S. stock market. However, the influence does not work the other way around. This is simply due to the sequence of stock exchange business hours. In this thesis, test results and graphs shows existence of comovement across national stock market and that its gradually increasing over time. Despite of continued fluctuation, correlation coefficients of returns on stock market index across the globe have definite upward trend.

In South Korea, domestic stock market opened its door to foreign investors in 1992. Since then, the number of stock transactions by foreign investors has been increasing. As of now, it is known that around 30 percent of prevailing KOSPI stocks is owned by foreigner. Due to these facts, KOSPIs comovement with global stock markets has been increasing, as expected.