Abstract:
The effect of the economic crisis in the US on the economies of other countries in the
world was evident in the recent past. Financial sector of a country is a major part of its
economy and is regarded as one of the most affected sectors by the economic crisis.
Therefore, study of causal relationships between the US stock market and the world’s
major stock markets can be considered worthwhile. This study investigates the
interrelationships between the US S&P 500 Index and the stock market indices of world’s
major economies, by using the Granger causality test. Discovering Granger causality
structure is helpful for policy planners, investors, etc for their decision making.
Furthermore, these results can be used to improve the forecasting accuracy of a stock
market of interest.
The weekly Close price index of the US stock market (US S&P 500 Index) and some of
the world’s major stock market indices: Canadian GSPTSE Index, French FCHI Index,
German GDAXI Index, British FTSE Index, Australian AORD Index, Indian BSESN
Index, Chinese SSEC Index, Hong-Kong HIS Index, Japanese N225 Index, Singaporean
STI Index, South Korean KS11 Index, and the Taiwan TWII Index were considered for
this study. This study reveals that the US S&P 500 Index Granger causes majority of
market indices other than Canadian GSPTSE and the Japanese N255 Indices. Therefore,
the incorporation of the historical prices of the US S&P 500 Index increases the prediction
accuracy of the other stock market indices, except the Japanese N255 and Canadian
GSPTSE Indices. However, it is noted that both German GDAXI Index and South Korean
KS11 Index increase the prediction accuracy of the US S&P 500 Index as they Granger
cause the US S&P 500 Index. In conclusion, the US financial market affects those of most
of the selected countries for a considerable time period
