Who Leads Financial Markets?

The present paper embarks on an analysis of interactions between the US and Euroland in the capital, foreign exchange, money and stock markets from 1994 until 2006. Considering influences on financial market volatility, the estimations are carried out in multivariate EGARCH models using structural residuals. This approach consequently allows identifying the contemporaneous effects between the daily variables. Structural VARs or VECMs can therefore give answers to the question of financial markets leadership: Generally speaking, the US effects on Europe still dominate, but the special econometric methodology is able to uncover otherwise neglected effects in the reverse direction.Structural EGARCH, Financial Markets, United States, Euro Zone.

Correlation vs. Causality in Stock Market Comovement

This paper seeks to disentangle the sources of correlations between high-, mid- and lowcap stock indexes from the German prime standard. In principle, such comovement can arise from direct spillover between the variables or due to common factors. By standard means, these different components are obviously not identifiable. As a solution, the underlying study proposes specifying ARCH-type models for both the idiosyncratic innovations and a common factor, so that the model structure can be identified through heteroscedasticity. The seemingly surprising result that smaller caps have higher influence than larger ones is explained by asymmetric information processing in financial markets. Broad macroeconomic information is shown to enter the common factor rather than the segment-specific shocks.Identification, Spillover, Common Factor, Structural EGARCH, DAX

Macroeconomic Integration in Asia Pacific: Common Stochastic Trends and Business Cycle Coherence

This paper addresses the question of macroeconomic integration in the Asian Pacific region. Economically, the analysis is based on the notions of stochastic long-run convergence and business cycle coherence. The econometric procedure consists of tests for cointegration, the examination of vector error correction models, several variants of common cycle tests and forecast error variance decompositions. Results in favour of cyclical synchrony can be partly established, and are even exceeded by the broad evidence for equilibrium relations. In these domains, several leading countries are identified.Real Convergence, Cointegration, Common Cycles, Asia Pacific

Simultaneous Causality in International Trade

This paper proposes estimating causalities in bilateral international trade in simultaneous systems, including domestic and foreign GDP as well as mutual trade flows. Conventional macroeconomic theory mainly follows partial approaches like import functions or export-led growth. Focusing on the US relations with Euroland and Canada, cointegration analyses however reveal, that the system dynamics, and so both im- and exports, are simply governed by US GDP shocks. In conclusion, exploring sources and effects of international trade should be seen as an inherently empirical task.Import, Export, Causality, Cointegration.

Economic Integration and the Foreign Exchange

This paper demonstrates effects of economic convergence processes on the foreign exchange behaviour in a monetary modelling approach. Since the exchange rate represents the relative price of two currencies, commonness of stochastic trends between the fundamental determinants of supply and demand of the underlying monies restricts exchange rate movements to transitory fluctuations. In the spirit of optimal currency areas, this has the potential to serve as a criterion for an all-round integration of two economies. Empirically, such a constellation is found between Australia and New Zealand, whereas diverging trends in money and interest rates characterise the relation of Australia towards the US.Monetary Exchange Rate Model, Convergence, Stationarity, Australia.

Regional and Outward Economic Integration in South-East Asia

The subject of this paper tackles questions of macroeconomic integration of the South-East Asian countries South Korea, Singapore and Taiwan. Economically, the analysis is based on notions of stochastic long-run convergence and business cycle synchrony in the GDPs. According tests for cointegration and common serial correlation features reveal a high degree of coherence in long-run growth and medium-run fluctuations. This allows extracting a common stochastic growth trend and a common business cycle. Further analysis shows, both of these components are subject to stronger influences from the US than from Japan. Convergence towards these matured economies conspicuously appears since the 1990s.Real Convergence, Cointegration, Common Cycles, South-East Asia.

Economic Integration and the Foreign Exchange

This paper demonstrates effects of economic convergence processes on the foreign exchange behaviour in a monetary modelling approach. Since the exchange rate represents the relative price of two currencies, commonness of stochastic trends between the fundamental determinants of supply and demand of the underlying monies restricts exchange rate movements to transitory fluctuations. In the spirit of optimal currency areas, this has the potential to serve as a criterion for an all-round integration of two economies. Empirically, such a constellation is found between Australia and New Zealand, whereas diverging trends in money and interest rates characterise the relation of Australia towards the US.Monetary Exchange Rate Model; Convergence; Stationarity; Australia

Volatility and Causality in Asia Pacific Financial Markets

The present paper analyses interactions between the foreign exchange, money and stock markets in Asian Pacific countries from 1999 till 2006. Considering influences on financial market volatility, the estimations are carried out in multivariate EGARCH models using structural residuals. This approach consequently allows the identification of the contemporaneous effects between the variables. Structural VARs or VECMs can therefore give answers to questions of exchange rate stabilisation, monetary policy behaviour or equity market reagibility. Additionally, a correlation analysis of the identified innovations reveals the degree of coherence in the Asian Pacific region.Structural EGARCH, Financial Markets, Asia Pacific

Structural Dynamic Conditional Correlation

In the literature of identifcation through autoregressive conditional heteroscedasticity, Weber (2008) developed the structural constant conditional correlation (SCCC) model. Besides determining linear simultaneous in uences between several variables, this model considers interaction in the structural innovations. Even though this allows for common fundamental driving forces, these cannot explain time variation in correlations of observed variables, which still have to rely on causal transmission eects. In this context, the present paper extends the analysis to structural dynamic conditional correlation (SDCC). The additional fexibility is shown to make an important contribution in the estimation of empirical real-data examples.Simultaneity, Identifcation, EGARCH, DCC

The Euro and the Transatlantic Capital Market Leadership: A Recursive Cointegration Analysis

In this paper, the capital market relations between the Euro area and the USA are subject to investigation. Formally based on the uncovered interest rate parity (UIP), first a longrun equilibrium between Euro and US government bond yields is established in backward recursively estimated vector error correction models (VECMs). Subsequently, the focus lies on interest rate leadership and adjustment as well as capital market integration. One major finding shows, that the foundation of the European Monetary Union (EMU) strengthened its role relative to the USA. Furthermore, the transatlantic connections have become closer in the course time.Capital Market, UIP, Euro, Transatlantic Relations