The Comovement of US and UK Stock Markets

________________________________________________________________________________________________________________________________________

Working Paper Series No. 105 March 2002

_________________________________________________________________________________

The comovement of US and UK stock markets

T. Engsted and C. Tanggaard

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55

List of CAF’s Working Papers 1. O. E. Barndorff-Nielsen (November 1997), Processes of Normal Inverse

Gaussian Type. (Finance and Stochastics 2 (1998), 41-68. 2. P. Honoré (November 1997), Modelling Interest Rate Dynamics in a

Corridor with Jump Processes. 3. G. Peskir (November 1997), The Concept of Risk in the Theory of Option

Pricing. (Expanded version appears under the title ‘A true buyer’s risk and classification of options’ in Inform. Technol. Econom. Management 1, 2001, 1-20).

4. A. T. Hansen and P. L. Jørgensen (November 1997), Analytical

Valuation of American-style Asian Options. (Management Science, Vol. 46, No. 8, pp. 1116-1136, August 2000).

5. T. H. Rydberg (December 1997), Why Financial Data are Interesting to

Statisticians. 6. G. Peskir (December 1997), Designing Options Given the Risk: The

Optimal Skorokhod-Embedding Problem. (Stochastic Process. Appl. 81 pp. 25-38, 1999).

7. J. L. Jensen and J. Pedersen (December 1997), A note on models for stock

prices. 8. M. Bladt and T. H. Rydberg (December 1997), An actuarial approach to

option pricing under the physical measure and without market assumptions. (Insurance: Mathematics and Economics 22, 65-73, 1998)

9. J. Aa. Nielsen and K. Sandmann (April 1998), Asian exchange rate

options under stochastic interest rates: pricing as a sum of delayed payment options.

10. O. E. Barndorff-Nielsen and N. Shephard (May 1998), Aggregation and

model construction for volatility models.

11. M. Sørensen (August 1998), On asymptotics of estimating functions. (Brazilian Journal of Probability and Statistics, 1999, 13, p. 111-136).

12. A. T. Hansen and P. L. Jørgensen (August 1998), Exact Analytical

Valuation of Bonds when Spot Interest Rates are Log-Normal. 13. T. Björk, B. J. Christensen and A. Gombani (September 1998), Some

Control Theoretic Aspects of Interest Rate Theory. Published as: Some System Theoretic Aspects of Interest Rate Theory in: Insurance, Mathematics & Economics 1998, Vol. 22, pp. 17-23

14. B. J. Christensen and N. R. Prabhala (September 1998), The Relation

Between Implied and Realized Volatility. Published in: Journal of Financial Economics 1998, Vol. 50, pp. 125-150.

15. O.E. Barndorff-Nielsen and W. Jiang (August 1998), An initial analysis

of some German stock price series. 16. C. Vorm Christensen and H. Schmidli (September 1998), Pricing

catastrophe insurance products based on actually reported claims. (Insurance: Mathematics and Economics vol. 27 (2) pp. 189-200).

17. M. Bibby and M. Sørensen (September 1998), Simplified Estimating

Functions for Diffusion Models with a High-dimensional Parameter. (forthcoming Scandinavian Journal of Statistics).

18. P. Honoré (November 1998), Pitfalls in Estimating Jump-Diffusion

Models 19. P. Honoré (November 1998), Panel-Data Estimation of Non-Linear

Term-Structure Models.

20. T. Engsted and K. Nyholm (November 1998), Regime shifts in the Danish term structure of interest rates. (Empirical Economics, Vol. 25, 2000, pp. 1-13)

21. T. Hviid Rydberg and N. Shephard (December 1998), Dynamics of trade-

by-trade price movements: decomposition and models.

22. E. Hansen and A. Rahbek (December 1998), Stationarity and asymptotics of multivariate ARCH time series with an application to robustness of cointegration analysis.

23. C. Strunk Hansen (January 1999), The relationship between implied and realized volatility in the Danish option and equity markets. (Accounting and Finance 41(3), pp. 197-228 (2001)).

24. D. Duffie and D. Lando (January 1999), Term structures of credit

spreads with incomplete accounting information. Econometrica, 2000.

25. B. Huge and D. Lando (January 1999), Swap pricing with two-sided default risk in a rating-based model. (European Finance Review 1999, vol. 3, pp. 239-268).

26. H. Sørensen (March 1999), Approximation of the score function for

diffusion processes.

27. T. Björk and B.J. Christensen (March 1999), Interest rate dynamics and consistent forward rate curves. Published in: Mathematical Finance, 1999. Reprinted in The New Interest Rate Models, ed. Lane Hughston. London: Risk Books, 2000, pp. 313-332.

28. C. Vorm Christensen (March 1999), A new model for pricing catastrophe

insurance derivatives.

29. R. Poulsen (March 1999), Approximate maximum likelihood estimation of discretely observed diffusion processes.

30. A. Trolle Hansen and R. Poulsen (March 1999), A simple regime

switching term structure model. (Finance & Stochastics, Vol 4(4), pp 409-429, 2000).

31. B.J. Christensen and N.M. Kiefer (March 1999), Simulated moment

methods for empirical equivalent martingale measures. Published in: Simulation-Based Inference in Econometrics, eds. R. Mariano, T. Schuermann, and M.J. Weeks. Cambridge: Cambridge University Press, 2000, pp. 183-204. ISBN: 0-521-59112-0.

32. A. Grosen and P. Løchte Jørgensen (April 1999), Fair valuation of life

insurance liabilities: The impact of interest rate guarantees, surrender options, and bonus policies. (Insurance: Mathematics and Economics, vol. 26, No. 1, 2000, pp. 37-57).

33. M. Sørensen (April 1999), Prediction-based estimating functions.

(Econometrics Journal, 2000, 3, p. 123-147).

34. Lars Korsholm (April 1999), The GMM estimator versus the semiparametric efficient score estimator under conditional moment restrictions.

35. K. Nyholm (May 1999), Inferring the Private Information Content of

Trades: A Regime-Switching Approach.

36. K. Nyholm (May 1999), Analyzing Specialist’s Quoting Behavior: A Trade-By-Trade Study on the NYSE. (forthcoming Journal of Financial Research).

37. O.E. Barndorff-Nielsen and N. Shephard (May 1999), Non-Gaussian OU

based models and some of their uses in financial economics. (to appear: J.R. Statist. Soc. B 63 (2001))

38. B. Jensen and R. Poulsen (August 1999), A comparison of approximation

techniques for transition densities of diffusion processes.

39. G. Peskir and J. Shorish (August 1999), Market forces and Dynamic Asset Pricing (to appear in Stochastic Anal. Appl.)

40. T. Engsted and C. Tanggaard (August 1999), The Danish stock and bond

markets: Comovement, return predictability and variance decomposi-tion. (forthcoming Journal of Empirical Finance).

41. B. Jensen (August 1999), Pricing in incomplete markets by fuzzy

ranking.

42. B. Jensen (August 1999), Option pricing in the jump-diffusion model with a random jump amplitude: A complete market approach.

43. C. Christiansen (September 1999), Macroeconomic announcement effects

on the covariance structure of bond returns. (forthcoming Journal of Empirical Finance).

44. B.J. Christensen and N.M. Kiefer (November 1999), Panel Data, Local

Cuts and Orthogeodesic Models. Published in: Bernoulli, 2000, pp. 667-678.

45. O.E. Barndorff-Nielsen and K. Prause (November 1999), Apparent

Scaling. (to appear: Finance and Stochastics).

46. O. Linton, E. Mammen, J. Nielsen and C. Tanggaard (November 1999), Yield Curve Estimation by Kernel Smoothing Methods. (forthcoming Journal of Econometrics)

47. M. Kessler and A. Rahbek (November 1999), Asymptotic likelihood

based inference for cointegrated homogenous Gaussian diffusions. (forthcoming Scandinavian Journal of Statistics)

48. N. Væver Hartvig, J. Ledet Jensen and J. Pedersen (November 1999), A

class of risk neutral densities with heavy tails. Finance and Stochastics, vol. 5, no. 1, January 2001, pp. 115-128.

49. H. Bunzel, B.J. Christensen, P. Jensen, N.M. Kiefer, L. Korsholm, L.

Muus, G.R. Neumann, M. Rosholm (December 1999), Investment in human capital versus differences in company productivity levels: Specification and estimation of equilibrium search models for Denmark.. Published as: Specification and Estimation of Equilibrium Search Models for Denmark, Review of Economic Dynamics, 2001, pp. 90-126.

50. B.J. Christensen, P. Jensen, M. Svarer Nielsen, K. Poulsen, M. Rosholm

(December 1999), Public finance effects in an equilibrium search model with differences in company productivity levels: An application to Danish data. Published as The Equilibrium Search Model with Productivity Dispersion and Structural Unemployment: An Application to Danish Data. In: Panel Data and Structural Labour Market Models, eds. H. Bunzel, B.J. Christensen, P. Jensen, N.M. Kiefer, and D.T. Mortensen. Amsterdam: North-Holland, 2000, pp. 85-106. ISBN: 0-44-50319-6.

51. H. Bunzel, B.J. Christensen, N.M. Kiefer, L. Korsholm (December

1999), The asset pricing approach to the rate of return to human capital: An equilibrium search framework for Denmark. Published as Equilibrium Search with Human Capital Accumulation in: Panel Data and Structural Labour Market Models, eds. H. Bunzel, B.J. Christensen, P. Jensen, N.M. Kiefer, and D.T. Mortensen. Amsterdam: North-Holland, 2000, pp. 85-106. ISBN: 0-44-50319-6.

52. M. Berg Jensen (January 2000), Efficient method of moments estimation

of the Longstaff and Schwartz interest rate model.

53. C. Christiansen and C. Strunk Hansen (January 2000), Implied volatility of interest rate options: An empirical investigation of the market model.

Forthcoming in Review of Derivatives Research, 2001. (Review of Derivatives Research, 5(1), pp. 51-80 (2002)).

54. N.M. Kiefer and T.J. Vogelsang (February 2000), A new approach to the

asymptotics of HAC robust testing in econometrics.

55. B. Jensen, P. Løchte Jørgensen, A. Grosen (February 2000), A finite difference approach to the valuation of path dependent life insurance liabilities.

56. J. Lund Pedersen (March 2000), Discounted optimal stopping problems

for the maximum process.

57. M. Sørensen (March 2000), Small dispersion asymptotics for diffusion martingale estimating functions.

58. T. Mikosch and C. Starica (April 2000), Change of structure in financial

time series, long range dependence and the GARCH model.

59. T. Engsted (April 2000), Measuring noise in the permanent income hypothesis.

60. T. Engsted, E. Mammen and C. Tanggaard (April 2000), Evaluating the

C-CAPM and the equity premium puzzle at short and long horizons: A Markovian bootstrap approach.

61. T. Engsted and C. Tanggaard (April 2000), The relation between asset

returns and inflation at short and long horizons. (Forthcoming in Journal of International Financial Markets, Institutions & Money).

62. K.L. Bechmann and J. Raaballe (May 2000), A regulation of bids for

dual class shares. Implication: Two shares – one price.

63. H. Bunzel, N.M. Kiefer and T.J. Vogelsang (May 2000), Simple robust testing of hypotheses in non-linear models. Forthcoming in Econometrica.

64. D.G. Hobson and J.L. Pedersen (July 2000), The minimum maximum of a

continuous Martingale with given initial and terminal laws.

65. E. Høg (July 2000), A note on a representation and calculation of the long-memory Ornstein-Uhlenbeck process.

66. O.E. Barndorff-Nielsen (July 2000), Probability densities and Lévy densities.

67. O.E. Barndorff-Nielsen and N. Shephard (July 2000), Modelling by Lévy

processes for financial econometrics. (to appear in Levy Processes – Theory and Applications. Boston: Birkhaueser).

68. F.E. Benth, K. H. Karlsen and K. Reikvam (August 2000), Portfolio

optimization in a Lévy market with intertemporal substitution and transaction costs.

69. C. Christiansen (September 2000), Credit spreads and the term structure

of interest rates. (forthcoming special issue on ‘Credit Derivatives’ in International Review of Financial Analysis).

70. A. Lunde and A. Timmermann (September 2000), Duration dependence

in stock prices: An analysis of bull and bear markets.

71. T. Engsted (November 2000), Measures of fit for rational expectations models: A survey. (forthcoming Journal of Economic Surveys).

72. O.E. Barndorff-Nielsen and N. Shephard (November 2000), Econometric

analysis of realised volatility and its use in estimating Lévy based non-Gaussian OU type stochastic volatility models.

73. N.R. Hansen (December 2000), Classification of Markov chains onúk.

74. J. Perch Nielsen and C. Tanggaard (December 2000), Global polynomial

kernel hazard estimation.

75. J. Perch Nielsen and C. Tanggaard (December 2000), Boundary and bias correction in kernel hazard estimation.(Forthcoming Scandinavian Journal of Statistics).

76. O.E. Barndorff-Nielsen and S.Z. Levendorskii (December 2000), Feller

processes of Normal Inverse Gaussian type.

77. S. Boyarchenko and S. Levendorskii (December 2000), Barrier options and touch-and-out options under regular Lévy processes of exponential type.

78. G. Peskir and A.N. Shiryaev (December 2000), A note on the call-put

parity and a call-put duality (Theory Probab. Appl. 46, 2001, 181-83)..

79. C. Vorm Christensen (January 2001), How to hedge unknown risk.

80. C. Vorm Christensen (January 2001), Implied loss distributions for

catastrophe insurance derivatives.

81. O.E. Barndorff-Nielsen and N. Shephard (January 2001), Integrated OU processes.

82. H. Sørensen (March 2001), Simulated Likelihood Approximations for

Stochastic Volatility Models.

83. M. Berg Jensen and A. Lunde (March 2001), The NIG-S&ARCH Model: A fat tailed, stochastic and autoregressive conditional heteroskedastic volatility model. (Econometrics Journal, volume 4, pp. 319-342).

84. P. Reinhard Hansen and A. Lunde (March 2001), A comparison of

volatility models: Does anything beat a GARCH(1,1) ?

85. P. Mikkelsen (March 2001), Cross-currency LIBOR market models.

86. B.J. Christensen and R. Poulsen (June 2001), Monte Carlo Improvement of Estimates of the Mean-reverting Constant Elasticity of Variance Interest Rate Diffusion.

87. B.J. Christensen and C. Strunk Hansen (June 2001), New Evidence on the

Implied-Realized Volatility Relation (forthcoming European Journal of Finance)..

88. B.M. Bibby and M. Sørensen (August 2001), Hyperbolic Processes in

Finance. . (To appear in S. Rachev (ed.): Handbook of Heavy Tailed

Distributions in Finance. North Holland).

89. B.J. Christensen and M. Ørregaard Nielsen (August 2001), Semipara-metric Analysis of Stationary Fractional Cointegration and the Implied-Realized Volatility Relation in High-Frequency Options Data.

90. L. Stentoft (August 2001), Assessing the Least Squares Monte-Carlo

Approach to American Option Valuation.

91. O.E. Barndorff-Nielsen and N. Shephard (September 2001), Realised power variation and stochastic volatility models.

92. B.J. Christensen and N.M. Kiefer (September 2001), Estimation and inference in optimal stopping models of options and search.

93. P. Mikkelsen (September 2001), MCMC based estimation of term

structure models.

94. P. Mikkelsen (September 2001), On finite dimensional HJM representations.

95. A. Grosen and P. Løchte Jørgensen (September 2001), Life insurance

liabilities at market value.

96. P. Løchte Jørgensen (September 2001), Life insurance contracts with embedded options.

97. P. Løchte Jørgensen (September 2001), American-type indexed executive

stock options.

98. B.J. Christensen, R. Lentz, D.T. Mortensen, G.R. Neumann, A. Wervatz (October 2001), Management and employee compensation policy, and matched data on private firms: A no arbitrage asset pricing approach to on-the-job search and the wage distribution.

99. C. Strunk Hansen and N.R. Prabhala (October 2001), Underperformance

after SEOs: A bond market perspective.

100. C. Christiansen (November 2001), Long maturity forward rates.

101. M. Ørregaard Nielsen (November 2001), Efficient likelihood inference in nonstationary univariate models.

102. B.J. Christensen, R. Poulsen, and M. Sørensen (November 2001),

Optimal inference in diffusion models of the short rate of interest.

103. M. Sørensen and M. Uchida (March 2002), Small diffusion asymptotics for discretely sampled stochastic differential equations.

104. C. Christiansen and J. Lund (March 2002), Revisiting the Shape of the Yield

Curve: The Effect of Interest Rate Volatility.

105. T. Engsted and C. Tanggaard (March 2002), The comovements of US and UK stock markets.

106. T. Engsted and C. Tanggaard (March 2002), A new test for speculative bubbles based on return variance decompositions.

107. T. Engsted (March 2002), Misspecification versus bubbles in hyperinflation

data: Comment.

ISSN 1398-6163

Mailing address: University of Aarhus Telephone: +45 8942 1580Department of Economics Fax: +45 8613 6334Building 350 E-Mail: [email protected] - 8000 Aarhus C http://www.caf.dk