Co-movements between US and UK stock prices: the roles of macroeconomic information and time-varying conditional correlations

This paper develops an open-economy intertemporal growth model with We provide evidence on the sources of co-movement in monthly US and UK stock returns by investigating the role of macroeconomic and financial variables in a model with time-varying correlations. Cross-country communality in response is uncovered, with changes in US Federal Funds rate, UK bond yields and oil prices having negative effects in both markets. These effects do not, however, explain the marked increase in correlations from around 2000, which we attribute to time variation in the correlations of shocks to these markets. A regime-switching model captures this time variation well and shows the correlations increase dramatically around 1999-2000