Asymmetries in stock price co-movements
It is generally accepted that stock market prices tend to move together. However, very little is known about what factors influence the underlying co-movements between two stock markets. This thesis contributes to the literature by presenting a number of studies exploring different sources of stock market dynamic spillovers. The first part of the thesis presents a theoretical framework to link stock market integration with economic activity. Chapter 2 introduces international equity trading in a stochastic general equilibrium model. We explore the role of international portfolio diversification on transmission of shocks as well as the role of supply shocks in generating international stock returns co-movements. The second part of the thesis empirically investigates stock price co-movements using high frequency data sets. Chapter 3 analyses stock price spillovers between the London and New York equity markets. With multivariate GARCH models for intra-day data, we test the "global factors hypothesis" to assess whether equity market linkages are attributable to reactions of traders to information originating from foreign stock price movements. Chapter 4 explores the role of macroeconomic news as a source of international stock market co-movements using one minute frequency data. We use an unrestricted Vector Autoregressive model with the DAX, the Eurostoxx 50 and the FTSE 100 futures' returns to examine the short-term dynamic spillovers between these markets. In addition, the second part of the chapter analyses how macroeconomic releases affect the cross-country stock prices interactions. Chapter 5 describes a study of non-linear dynamics in stock market co-movements. Arbitrage activity motivates the introduction of a discrete regime-switching specification to model the dynamic relationship between the FTSE 100 cash and futures indices. In our model, arbitrageurs only enter the market if deviations from the theoretical non-arbitrage relationship level are sufficiently large to compensate for the transaction costs.