An empirical analysis of convergence for UK, US and European stock markets : the market risk premium and the value premium
The thesis investigates convergence between UK, US and European stock markets (1974-2001), to address four main questions: Are movements in the market rise premium for the UK associated with movements in the market risk premium for the US, or are they associated with movements in the market risk premium for European countries; are stock market prices converging over long horizons and what may drive such convergence; are the characteristics of the market risk premium similar to the characteristics of value risk premium; and, finally, can the value premium be linked to economic business conditions in such a way that convergence of this risk factor across national boundaries is possible? The main conclusions from this thesis are (i) The UK market risk premium appears to be converging with its US counterpart rather than market risk premium in European stock markets. (ii) A common fundamental factor is more pronounced between UK and US stock markets rather that than the European markets. (iii) The evidence supporting the convergence of market risk premium between the UK and the US is not replicated for the value premium, where convergence trends are much less marked. (iv) The evidence on the source of the value premium suggests that the rational explanation and subsequent link to business conditions is relevant for the US stock market only. Subsequently, it is perhaps unsurprising to find that there is little evidence of global convergence for the value premium. Overall, these results imply that the time may not be right for any acceleration of merger activity between the UK stock market and its European neighbours.