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Common Stochastic Trends and Predictability of International Stock Prices
Journal article   Peer reviewed

Common Stochastic Trends and Predictability of International Stock Prices

Bong-Soo Lee and Bang Nam Jeon
Journal of the Japanese and international economies, v 9(3), pp 245-277
1995

Abstract

This paper investigates comovements and predictability of aggregate stock prices in Japan, Germany, the United Kingdom and the United States for the period from January 1975 to December 1990. The paper finds that the unit root nonstationary stock prices in the four countries are cointegrated with a single cointegrating vector, and share a long-run equilibrium relationship. Since each national stock price series contains information on the common stochastic trends, the predictability of one country′s stock prices can be enhanced significantly by utilizing information on other countries′ stock prices and on world common stochastic trends. It is found that U.S. stock prices contain substantial information on future movements of other countries′ stock prices. The subsample estimation results provide evidence of increasing comovements of stock prices and of the increasing importance of U.S. and Japanese stock prices in the major world stock markets during the 1980s. J. Japan. Int. Econ., September 1995, 9(3), pp.245–277. Carlson School of Management, University of Minnesota, Minneapolis, MN 55455; and Department of Economics, Drexel University, Philadelphia, Pennsylvania 19104

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Collaboration types
Domestic collaboration
Web of Science research areas
Economics
International Relations
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