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November/December 1988, 
Vol. 70, No. 6
Posted 1988-11-01

Are National Stock Markets Linked?

by Gerald P. Dwyer, Jr. and R. W. Hafer

Gerald P. Dwyer, Jr. and R. W. Hafer investigate the connection among stock price behavior in the United States, Germany, Japan, and the United Kingdom. Much of the recent commentary about stock prices both before and after the October 1987 crash suggests that stock prices in different countries rose and fell as one. The authors show that, under certain assumptions, there is no reliable relationship between the levels of prices in various stock markets, even though changes in the different market measures may be related. The empirical evidence presented is based on two data sets. One consists of daily stock prices for the different countries from July 1987 through January 1988. Using this data, which includes the worldwide decline in stock prices in October, Dwyer and Hafer find no evidence to support the notion that prices around the world “ratcheted up” before the crash, as some have argued. To put their analysis in a historical perspective, the authors examine a second data set, which consists of monthly stock price values for each country from 1957 through 1987. Test results based on these data corroborate those using the daily data: There is no link among the levels of stock prices across national markets.

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