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This study examines how the European stock market reacts to the US fundamentals including the Federal Fund Rate (FFR), the Euro-dollar exchange rate, and the US stock market indices. The results from Johansen and Juselius cointegration technique suggest that a long-term relationship exists between the European stock market, and the US fundamentals. The Granger causality test indicates that causality runs from the US to European stock market. Using a Vector Error Correction Model (VECM) the authors measure the long and short-term elasticity of the European Stock Market not only to European fundamentals, but to the US fundamentals, the parity of the Euro-dollar exchange rate, and the US stock market indices.
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