This study examines dynamic linkages between the New York and Tokyo stock markets using daily index data. In contrast to previous analyses, both short-term and long-term intermarket adjustments are modeled and estimated simultaneously based on a vector error correction model of cointegration. Significant evidence for both short- and long-term feedback relationships between the two stock markets is found. Further subsample analysis reveals that the presence of two-way effects between the two markets is a rather recent phenomenon taking place in the late-1980s. notably in the post-1987 crash period. The results suggest that the New York and Tokyo markets are increasingly interdependent over time, and that the U.S. market is not always the leading stock market.
Journal of International Financial Markets Institutions & Money, 3(2), 73-96