| Using various time series methods, this paper finds the interrelationships between stock indexes in the major stock markets for the period of January 1978 through December 1986. This study finds that the U.S. stock market is the most influential market in the world.;The degree of interdependence between the major stock markets became more significant when we included the exchange rate factor into local currency return of stock indices. This is evidence that the movement of stock price has negative relationships with the exchange rate, since stock price and exchange rate share deterministic variables.;Finally, we expanded our study to the nonlinear modeling method. While the result of tests for nonlinearity show that significant nonlinearity exists in residuals of the VAR model, empirical evidence from the MARS analysis also supports the existence of interrelationships between stock indexes.;The result of this changing pattern in the interrelationship between the Japanese stock market and the world's major stock exchange was found consistent with both impulse response function and with the OLS from the lagged price-change model. On the other hand, the London market has shown greater independence from other major stock exchange since the break point of December 1, 1982. It has been less influenced by the U.S. stock market. |
