The UK stock market’s relationship with US and European stock markets: Is the UK stock market snuggling-up to the US - or to Europe?

Abstract

Using 27 years of data this paper considers short-run, bi-lateral, and long-run, linkages between the US, UK and nine European equity markets. Using time-varying parameter and multivariate cointegration modelling techniques, we show that since October 1992, UK stock market returns have become increasingly sensitive to perturbations in the US market relative to those in European markets. We also report evidence to suggest that over the long term stock markets are perfectly correlated and although deviations from this long-term trend do occur, with the possible exception of the US and UK market, they are rarely significant. For the US and UK markets, we found that the 1990s has tended to display a few small, but significant deviations, from the permanent component of stock prices. Overall, however, any gains from international diversification would tend to be short-lived.