Knut Wicksell Working Paper Series,
Lund University, Knut Wicksell Centre for Financial Studies

Abstract: We employ spatial econometrics techniques to investigate to what extentcountries’ economic and geographical relations affect their stock market comovements.We propose an econometric model that is particularly suitable for financial data, where common time trends prevail. In general, among the relations that we analyze, bilateral trade and exchange rate stability prove to be best suited to capture return co-variations. An analysis of three regionally dominant countries shows that bilateral trade is the most important relation regarding the transmission of shocks from the US and Japan to other countries, whereas the UK affects mostly its geographical neighbors.

Keywords: Financial and economic integration; stock market co-movements; spatial econometrics; feedback effects

JEL-codes: C23; G15

37 pages, February 3, 2013

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