Asymmetric effects of U.S. stock returns on European equities

An asymmetric conditional mean returns model describing co-movements of three major European stock markets with the U.S. stock market is estimated. Multivariate conditional heteroskedasticity is captured by a VAR(p)-MGARCH(p,q)-BEKK parameterization. Conditional Sharpe ratios from alternative mean-volatility specifications are compared with multivariate t-tests. Results consistently indicate that France has offered the best risk-adjusted returns compared to the U.K. or Germany taken from a U.S. investor's viewpoint. All three European markets show a tendency to move counter-cyclically with the U.S. market, on average, suggesting ongoing substitution by global investors between U.S. and major European equities. Unconditional Sharpe ratios understate conditional Sharpe ratios for each market.