Return and volatility linkages between the US and the German stock market

This study investigates the contemporaneous correlation and the spillover effects between the US and the German stock markets around the opening of the two markets. It is based on a newly compiled sample of intra-day data for the two blue chip indices, the Dow Jones Industrial Average (DOW) and the Deutsche Aktienindex (DAX). Our main findings are as follows: foreign daytime returns can significantly influence the domestic overnight returns; this holds for both the US and the German market; there is no evidence of spillovers from the previous daytime returns in the US to the DAX morning trading; short-lived mean spillovers, especially from the DAX noon-to-3:30 pm (CET) segment into the DOW, can be identified; and the uncritical use of the DAX opening quote is very likely to produce spurious results due to institutional peculiarities. To avoid this problem we propose a proxy for the DAX opening that appears satisfactory.