Measuring International Economic Linkages with Stock Market Data




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    • Board of Governors of the Federal Reserve System and Department of Finance, New York University, respectively. Opinions expressed herein do not necessarily concur with those of the Federal Reserve Board or any other employees of the Federal Reserve System. The authors would like to thank Gordon Bodnar, Shane Corwin (the copy editor), Joe Gagnon, Campbell Harvey, Steve Heston, Matt Pritsker, Will Goetzman, René Stulz (the editor), an anonymous referee, and participants at American Finance Association 1994 meeting and the International Finance Workshop of the Federal Reserve Board for helpful discussions. The authors are also grateful to Stephen Brown for providing some of the international stock market data. Some of the U.K. stock market data used in the analysis herein were extracted from the London Share Price Database, which is a copyright work of the London Business School.


This article develops a new framework for measuring financial and real economic linkages between countries. Using United States and United Kingdom data from 1957 to 1989, we find closer financial linkages after the Bretton Woods currency arrangement was abandoned and Britain suspended exchange controls. In a pairwise application to fifteen countries over a shorter period, we also find that news about future dividend growth is more highly correlated between countries than contemporaneous output measures. This suggests that there are lags in the international transmission of economic shocks and that contemporaneous output correlation may understate the magnitude of integration.