What is Behind International Stock Market Linkages? Testing for Linear and Non-Linear Causality between Fundamental and Non-Fundamental Components

Abstract

While there is a growing body of research devoted to the problems of financial contagion, the bulk of the literature on international market interdependences does not distinguish between fundamental and non-fundamental determinants behind stock market linkages. This paper attempts to fill this gap. Indeed, we document the presence of linear and non-linear Granger causality between French, German, Japanese, UK and US indexes and their fundamental and non-fundamental components from 1974 to 2000. We show that the main source of international stock indexes linkages is related to non-fundamentals factors.

Keywords: Stock market linkages, financial contagion, non-fundamental, linear and non-linear causality

JEL Classification: C32, E44, G15