Bootstrap Causality Tests of the Relationship Between the Equity Markets of the US and Other Developed Countries: Pre- and Post-September 11

Abstract

We analyse the causal relationship between the equity markets of the US and those of the UK, Japan, Germany, France, Canada and Australia based on leveraged bootstrap approach and ARCH effects in the data. Using weekly MSCI price indices, we focus our investigation on the period 1998 to 2005 which we divided into two sub-periods to take into account the potential structural break arising from September 11. Our results show that before September 11, there was bi-directional causality between the US and Japan and between the US and Germany. In addition, there was also a uni-directional causality from the US to Canada and from the US to France. After September 11, the only causality was a uni-directional one from the US to Japan and the UK to the US. Thus, after September 11, the US Granger-caused a fewer markets. This could imply that after September 11, the other markets become more efficient in responding to information transmitted from the US market.