The Relationship Between Equity Indices on World Exchanges

STUDIES OF WORLD CAPITAL market efficiency have typically focused on the merits of diversification, the comovement of equity prices, or the lead-lag relationship among market indices.' Grubel [7], Levy-Sarnat [10] and Solnik [14] have investigated the merits of international diversification by employing a meanvariance portfolio framework. More recently, researchers such as Lessard [9], Stehle [15], and Adler and Dumas [1] have investigated the related issue of segmented versus internationally integrated markets. The comovement of world exchange indices and stocks has been addressed, among others, by Panton, Lessig, and Joy [11], Ripley [12] and Robichek, Cohn and Pringle [13]. Panton, Lessig, and Joy use cluster analysis to conclude that there is some stability and structure in international markets, with some markets having high degrees of similarity. Ripley, using factor analysis, finds more than half of the movement in the typical developed country's index is unique to the country. Robichek, Cohn, and Pringle find a lack of significant correlation between ex-post returns of common stock in Australia, Japan, and the United States. Lead-lag relationships have been studied by Agmon [2], Branch [3], and Granger and Morgenstern [6]. Agmon finds no significant leads or lags on a monthly basis among the common stocks of Germany, Japan, the United Kingdom, and the United States. Granger and Morgenstern use spectral analysis on weekly data for stock indices in eight countries and conclude that "contrary to widespread beliefs, there is little or no interrelationship between different stock market exchanges around the world." However, they do note some relationship between New York-Amsterdam and Germany-Amsterdam. Further, they suggest that markets would not likely 1be independent if a world-wide financial crisis occurred or a war began.2 The purpose of this paper is to specifically examine the structure of international equity market indices during a world-wide financial crisis. Therefore, we chose to examine daily data generated during the period July 7, 1973 to April 30, 1974. This period included an event of significant world wide impact-the OPEC