Date Added: Jun 2009
This paper examines how the European stock market reacts to the U.S. financial crisis and the Fed's policy, changing FFR. Johansen and Juselius cointegration analysis suggests that markets are integrated and there exists a long term relationship between these markets. The Granger causality test indicates that causality runs from US to European stock market. Implementing a Vector Error Correction Model (VECM), accounting for monetary and exchange rate policies, the authors measure the long-run elasticity of the European Stock Market not only to the Fed's policy, but to the US market indices and the parity of the Euro-dollar exchange rate.