A common factor analysis for the US and the German stock markets during overlapping trading hours

Michael Flad and Robert Jung ()

Journal of International Financial Markets, Institutions and Money, 2008, vol. 18, issue 5, 498-512

Abstract: We employ a bivariate common factor model to establish a permanent-transitory decomposition of two major stock indices (the Deutsche Aktienindex (DAX) for Germany and the Dow Jones Industrial Average (DJIA) for the United States). Using high-frequency data, we (1) identify a common trend shared by both indices, (2) find that the DJIA contributes up to 95% to the total innovation of the common factor, (3) show that both markets adjust within minutes to a system-wide shock, and (4) verify by hypothesis testing that the DJIA is the driving force in the transatlantic system of stock indices.

Date: 2008
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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:18:y:2008:i:5:p:498-512

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