Do the US trends drive the UK–French market linkages?: empirical evidence from a threshold intraday analysis

Abstract

This article investigates the impact of US stock market openings on linkages between the UK and French markets. Using intraday data over the period December 2004 to March 2009, we find significant time-varying dependence between the UK and French stock returns, which alter according to the state of the US market. Indeed, not only does the opening of the US market itself significantly affect the UK stock dependency, but such linkages also seem to be closely dependent on bearish or bullish US market trends. Interestingly, the estimation of a two-regime Threshold Autoregressive (TAR) model indicates that the bearish US trends are a source of minor linkage (lower regime), whereas the bullish US trends involve higher interdependency (upper regime). This finding is particularly interesting as following the US trend expectations enables us to better forecast future European stock prices and to calculate the level of their potential contagion effects.

Keywords:

• dependency
• contagion
• US stock market news
• structural breaks
• TAR

JEL Classification:

• C22
• G15

Notes

¹ Stock prices are integrated of order one, I(1), according to the Dickey–Fuller and Phillips–Perron tests; we thus focus on stock returns dynamics.

² The i.i.d. and normality assumptions may not be checked for financial data due to outliers and/or ARCH effects. Thus, we estimated models 1 and 2 through the Ordinary Least Squares (OLS) estimator, but their SEs are estimated without relying on the above assumptions. Robust SEs are provided by Eicker–White SEs (White, 1980).