Explaining Co-Movements between Stock Markets : The Case of Us and Germany

We explain co-movements between stock markets by explicitly considering the distinction between interdependence and contagion. We propose and implement a full information approach on data for US and Germany to provide answers to the following questions: (i) is there long-term interdependence between US and German stock markets? (ii) Is there short-term interdependence and contagion between US and German stock markets, i.e do short term fluctuations of the US share prices spill over to German share prices and is such co-movement unstable over high volatility episodes? Our answers are, respectively, no to the first question and yes to the second one