A Dynamic Analysis of S&P 500, FTSE 100 and EURO STOXX 50 Indices Under Different Exchange Rates

The persistence analysis of short- and long-term interaction and causality in the international financial markets is a key issue for policy makers and portfolio investors. This paper assesses the dynamic evolution of short-term correlation, long-term cointegration and Error Correction Model (hereafter referred to as ECM)-based long-term Granger causality between each pair of US, UK, and Eurozone stock markets over the period of 1980--2015 using the rolling-window technique. A comparative analysis of pairwise dynamic integration and causality of stock markets, measured in common and domestic currency terms, is conducted to evaluate comprehensively how exchange rate fluctuations affect the time-varying integration among the S&P 500, FTSE 100 and EURO STOXX 50 indices. The results obtained show that the dynamic correlation, cointegration and ECM-based Granger causality vary significantly over the whole sample period. The degree of dynamic cointegration and correlation between pairs of stock markets rises in periods of high volatility and uncertainty, especially under the influence of external and internal economic, financial and political shocks. Meanwhile, weaker and decreasing cointegration and correlation among the three developed stock markets are observed during the recovery periods. Interestingly, the most persistent and significant cointegration among the three developed stock markets exists during the 2007--09 global financial crisis. Finally, the exchange rate fluctuations, also influence the dynamic correlation, cointegration and ECM-based Granger casual relations between all pairs of stock indices, with that influence increasing as the local currency terms are used