Estimation of the common and country-specific shock to stock prices

We estimated the size of a global common shock and country-specific shocks to stock returns of four major countries (Japan, the UK, Germany and the US). We assumed the disturbance terms of a VAR model consist of these two types of shocks. Their variances were estimated from the variance-covariance matrix with several independence assumptions for identification. We used monthly data from January 1965 through January 2003, divided into three subperiods. We found that common shock has considerable magnitude, which has grown over the 38-year period. We interpret this as a significant cause of international stock price linkage. J. Japanese Int. Economies19 (3) (2005) 322-337.