Cyclical Comovement in World Indices

Carlos Pinho* and Mara Madaleno**

May 8, 2009

* Carlos Pinho
E-mail: cpinho@ua.pt
GOVCOPP / DEGEI –Departamento de Economia Gestão e Engenharia
Industrial
Universidade de Aveiro
Campus Universitário de Santiago, 3810-193 Aveiro, Portugal
Fon: (+351) 234 370 361, Fax: (+351) 234 370 215
** Mara Madaleno
E-mail: maramadaleno@ua.pt
DEGEI –Departamento de Economia Gestão e Engenharia Industrial
Universidade de Aveiro
Campus Universitário de Santiago, 3810-193 Aveiro, Portugal
Fon: (+351) 234 370 361, Fax: (+351) 234 370 215

Keywords: stock market indices; maximal overlap discrete wavelet trans-

form; cross-wavelets; international comovement; diversi…cation

Abstract
In this paper we review the issue of international comovement of stock in-
dices. The most powerful argument for cross-border investing is the risk re-
duction due to low correlation of world’s stock markets. Diversifying risk has
become even more important as …nancial markets globalize, helped by advanced
information technology which lowers the transaction costs. Systematic risk is
lowered through international diversi…cation in markets with low correlation
with domestic markets. Investors must be willing to take advantage of these
correlations to reduce volatility in their portfolios.
The current work tries to analyze the relationship among eleven stock in-
dices using wavelet theory, applying the MODWT and CWT techniques. The
…ndings suggest that there is strong to moderate cointegration among many
stock markets, and as such there is evidence of intra-continental relationships.
The importance of historical transmissions is low for the period under analysis.

1 Introduction
Trade and …nancial liberalization since the nineties determined the process of
globalization that has been further enhanced by the recent trend of the in-
ternational stock market indices to become more and more integrated. As a
consequence of the increased integration, business cycles synchronization and
stock returns correlations are expected to raise over time and across countries.

1
 The determination of diversi…cation strategies by an international investor
also depends on the nature and magnitude of the relationships existing between
di¤erent stock markets. As such, it is important for international investors to
understand the interrelations among the various markets to diversify risk and
to derive high return. The present work tries to investigate the relationship,
and to compare the daily dynamics of eleven stock market indices around the
world, namely the DAX30 of Germany, the CAC40 of France, the ATX20 of
Austria, the IBEX35 of Spain, the FTSE100 of United Kingdom (comprising
the …ve European markets considered), the MerVal of Argentina, the Bovespa
of Brazil (the two Latin American indices), the Nikkei225 of Japan, the Hang
Seng of Hong Kong (the Asian indices sample), and from the United States the
Nasdaq Composite Index and the Dow Jones Industrial Average30 (DJIA30).
Empirical studies investigating the interdependence and comovement be-
tween international stock markets are based on the estimation of a correlation
matrix of stock market index returns and/or on multivariate analysis techniques,
such as cointegration theory and principal component analysis (King, Sentana
and Sushil, 1994; Longin and Solnik, 1995, 2001; Karolyi and Stulz, 1996;
Neaime, 2002; Da Costa et al., 2005; Brooks and Del Negro, 2005, 2006; Kizys
and Pierdzioch, 2009). Most of these studies have found that the comovement
of stock returns is not constant over time.
Eun and Shim (1989) use the Vector Autoregressive (VAR) model to in-
vestigate the relationship among nine major stock markets (Australia, Canada,
France, Germany, Hong Kong, Japan, Switzerland, the UK and US) to con-
clude that news beginning in the US market has the most in‡uence on the other
markets. Lin, Engle and Ito (1994) explore the interdependence between the
returns and volatility of Japan and the US market indices using daytime and
overnight returns. Ng (2000) found signi…cant spillover e¤ects from Japan and
the US stock market on six Paci…c-Basin markets, namely Hong Kong, Korea,
Malaysia, Singapore, Taiwan and Thailand. With a di¤erent technique, Kim
and Rogers (1995) use GARCH to study the comovement between the stock
markets of Korea, Japan and the US. Results indicate that the spillovers from
Japan and the US have increased since the Korean market became open for out-
siders to own shares. Brooks and Del Negro (2004) and Kizys and Pierdzioch
(2009) found evidence of increasing international comovement of stock returns
since the mid-90’s among the major developed countries.
Antoniou, Pescetto and Violaris (2003) applied a VAR-EGARCH model to
study the relationship among three EU markets (UK, Germany and France)
presenting some evidence of cointegration among those countries. In addition,
Bessler and Yang (2003) employed an error correlation model and Directed
Acyclic Graphs to investigate the interdependence among nine mature mar-
kets (Japan, US, UK, France, Switzerland, Hong Kong, Germany, Canada and
Australia, to show that both changes in European and Hong Kong markets in‡u-
enced the US market, while this was also a¤ected by internal events. In studying
the relationship between market cointegration and the degree to which com-
panies operate internationally, Brooks and Del Negro (2006) considered three
factors (global, country-speci…c and industry speci…c) to found that the impor-

2
tance of the international factor has increased since the 1980’s, while that of the
country-speci…c factor has decreased on all markets.
The comovement analysis should also consider the distinction between short
and long-term investor. Candelon, Piplack and Straetmans (2008) argue that
from a portfolio diversi…cation point of view, the short term investor is naturally
more interested in the comovement of stock returns at higher frequencies, that
is, short term ‡uctuations, but the long term investor focus on the relationship
at lower frequencies (long-term ‡uctuations). As such, one has to resort to
the frequency domain analysis to obtain insights about the comovement at the
frequency level (Lee, 2004; Pakko, 2004, Sharkasi, Ruskin and Crane, 2005; Rua
e Nunes, 2009).
In such a context, with both the time horizon of economic decisions and the
strength and direction of economic relationships between variables that may
di¤er according to the time scale of the analysis, a useful analytical tool may
be represented by Wavelet analysis. Wavelet analysis is a comparatively new
and powerful mathematical tool for signal processing. The main advantage of
wavelet analysis is its ability to decompose macroeconomic time series, and
data in general, into their time scale components. Moreover, because of the
translation and scale properties, nonstationarity in the data is not a problem
when using wavelets and pre…ltering is not needed.
Several applications of wavelet analysis in economics and …nance have been
recently provided by Ramsay and Lampart (1998a, 1998b), Ramsay (2002), Kim
and In (2003) and In and Kim (2006), among others. More recent applications
of Wavelet theory for the international comovement of stock indices have been
applied by Lee (2004), Sharkasi, Ruskin and Crane (2005) and Rua e Nunes
(2009).
Lee (2004) developed a new testing technique based on the Wavelet trans-
form to study international transmission e¤ects. He applies this technique to
US, Germany and Japan (developed markets) and two emerging markets in the
Middle East and North Africa (MENA) region, namely Egypt and Turkey. He
reports that movements from the developed markets a¤ected the developing
markets but not vice versa. Sharkasi, Ruskin and Crane (2005) use a new test-
ing method, based on the wavelet transform to reconstruct the data series, to
investigate the price interdependence between seven international stock mar-
kets (Ireland, UK, Portugal, US, Brazil, Japan and Hong Kong). They …nd
evidence of intra-European market comovement with the US market, while US
markets impact Asian markets, which in turn in‡uence European markets. In
sum, intra-continental relationships are evident and they also …nd an increase
in importance of international spillover e¤ects since the mid 1990’s, while the
importance of historical transmissions has decreased since the beginning of this
century. In a similar fashion, Rua and Nunes (2009) also tested the stylized
fact that the degree of comovement has changed over time using Wavelet tech-
niques applied to four major markets, namely, Germany, Japan, UK and US.
The analysis is done both at the aggregate and sectorial levels. Following their
results, the degree of comovement of the German market with the US and UK
markets is characterized by some permanent changes over time: a gradual but

3
steady increase of the comovement at the lower frequencies, and also a sudden
increase after the end of the nineties for the other frequencies.
Our main purpose will be to …nd intrinsic characteristics of stock market
indexes around the world, with respect to their distributional characteristics,
performing Wavelet analysis. The present work di¤ers from the three previous
mentioned works since we extend the data sample to more countries, because
we apply the Maximal Overlap Discrete Wavelet Transform (MODWT) and
…nally, through the analysis of cross-correlations and cross-covariances between
stock market indices around the world (Cross-Wavelets techniques - CWT).
The CWT technique expands a time series into a time frequency space where
oscillations can be seen in a highly intuitive way, as such this technique exposes
regions with high common power and further reveals information about the
phase relationship.
The …ndings suggest that there is strong to moderate cointegration among
many stock markets, and as such there is evidence of intra-continental rela-
tionships. However, our results are not in line with those previous empirical
…ndings that innovations in the US and UK stock markets are rapidly trans-
mitted to other markets. The Asian markets appear to be more correlated with
the European markets than with the Latin America ones, but less correlated
with the EUA markets than the European ones where the fact geography plays
an important role. We may also take some lessons from here and predict that
in face of some market problem in Asia, Europe will be a¤ected …rst than the
EUA markets, but only after the Latin American countries will su¤er the same
impact. With respect to EUA shocks, these will impact …rst the Latin American
countries, only after the European ones and at the end the Asian stock market
indices. With respect to UK, it is strongly a¤ected by the Japanese market (not
so much by the Hong Kong stock market) and by the closest geographically
European countries. The EUA market also exerts a strong e¤ect in the UK
stock market, but the South America countries do not exert such pressure in
the UK stock market. These adjustments are clockwise and should be taken into
account by international stock market indices investors in their portfolio com-
position. Finally, as evidenced by the CWT analysis countries more distant in
geographic terms exhibit a lower intensity level of energy with respect to those
situated at a closer distance, reinforcing the idea that the closer the market the
higher the impact, although impacts are only re‡ected in lower frequency levels
corresponding to an higher daily span separating the spillover e¤ects. As such,
the CWT technique improves upon the others in terms of allowing for a better
understanding of the series comovement at di¤erent frequencies.
This paper is organized as follows. In section 2, the comovement measures in
the Wavelet domain are presented. In section 3, data overview and descriptive
statistics is provided. In section 4 the empirical results, using the techniques
described in section 2, for the eleven stock market indices are discussed. Finally,
section 5 concludes pointing out directions for future research.

4
2 Empirical techniques
In this section we present the empirical techniques to be employed in this work,
namely wavelets, DWT and MODWT, wavelet variance and covariance decom-
position.

2.1 Why the use of wavelets?

Mostly, to be able to use time dependent spectra.
The spectral density plot (frequency versus power) identi…es the frequency
components that exist in the time series. The small ripples in the spectral
density are caused by the sudden changes from one frequency to another in
the time series. Also, the di¤erent power at each frequency is caused by the
di¤erent duration and period of the active frequency components in the time
series. However, the spectral density does not provide any information on the
time localization of the di¤erent frequency components. That is, on the basis
of the spectral density, it is not possible to identify where in time each of the
(two, three, four....) frequency components are active.
In Fourier analysis, no time information is available in the spectral density
and no frequency information is available in the time-domain representation
of the time series. By considering the frequency-domain representation of a
time series one may know which frequency components are active in the time
series, but not when they were active. However, this limitation is not relevant
for stationary series because all of the frequency components that exist in the
series are active throughout its entire duration.
In the time domain, one knows when things happened (features can be lo-
calized in the time domain) but we have no information about frequency. The
maintained hypothesis underlying the Fourier transform is that all of the fre-
quency components that are active in the time series exist with the same am-
plitudes at all points in time, that is, the time series is homogeneous through
time.

2.2 Wavelet transforms

The family of wavelet transforms di¤ers from the Fourier transform in one crucial
respect - wavelets are constructed over …nite intervals of time, whereas the
sines and cosines that underpin Fourier analysis range over in…nity. Wavelet
transforms thus have an important advantage over the Fourier transform in that
they can retrieve information about frequency (or scale) and time localization
from the original series.
The term wavelet refers to a small wave: small because the wavelet function
is non-zero over a …nite length of time (compactly supported) and wave because
the function oscillates. Wavelet functions are constructed on the basis of location
and scale parameters and a "mother wavelet" function:
1 t
;s =p (1)
s s

5
The mother wavelet (:) serves as a prototype for generating other window
functions. The term translation, , refers to the location of the window. As the
window shifts through the signal, the time information in the transform domain
is obtained. The term scaling, s, refers to dilating or compressing the wavelet.
To extract frequency information from the time series in question, the mother
wavelet is dilated or compressed to correspond to cycles of di¤erent frequencies.
The extent of compression or dilation is determined by the scale parameter, s.
To extract time information from the time series the set of wavelet functions at
di¤erent scales is moved through the time series from beginning to end. The
position of a particular wavelet function in the time series is determined by the
location parameter, . In this way an entire set of wavelets can be generated
from a single mother wavelet function and this set can then be used to analyze
the time series.
Wavelet coe¢ cients are given by the transformation:
Z
C ;s = f (t) ;s (t)dt (2)

being f (t) the original time series. If f (t) has a spectral component corre-
sponding to the current wavelet scale (s) at the location , then the product
f (t) ;s (t) will be relatively large. If a spectral component at scale s is not
present in f (t) at a given location then this product will be relatively small or
even zero. Wavelets constructed over short time scales will tend to isolate sharp,
high frequency volatility in the time series. Because of the short time scales, this
information will have good time resolution but poor scale (frequency) resolution.
Relatively long-scale wavelets will tend to capture low frequency volatility and
will have relatively poor time resolution but good scale (frequency) resolution.
Plotting the wavelet coe¢ cients of a series we are able to see the extent of
power in the time series at each time-scale combination. Unlike the spectral
density, the wavelet coe¢ cients clearly identify the di¤erent time periods over
which each of the three frequency components are active.
There are two classes of wavelet transforms: the Continuous Wavelet Trans-
form (CWT) and its discrete counterpart (DWT). The DWT is a compact rep-
resentation of the data and is particularly useful for noise reduction and data
compression, whereas the CWT is better for feature extraction purposes.
The discrete wavelet transformation (DWT) calculates wavelet coe¢ cients
over a dyadic scale, that is, sj = 2j ; j = 1; 2; 3; ::: to illustrate the spectral prop-
erties of the series under analysis, we reconstruct the original time series at each
scale using an inverse wavelet transformation. In e¤ect, this procedure allows
us to decompose the series into cyclical components at each admissible scale
(or frequency). Notice that the maximum wavelet scale depends on the sample
period of the data. As such we need to present/display cyclical components at
the di¤erent scales we may have.
Wavelets are a relatively recent innovation in mathematics and originally
stem from research by Mallat (1989) and Daubechies (1992). The main feature
of wavelet analysis is that it enables the researcher to separate a variable or

6
signal into its constituent frequency components. Note that when the number
of observations is dyadic, the number of coe¢ cients of each type is given by:
. at the …nest scale 21 : there are n2 coe¢ cients labelled d1;k ;
. at the next scale 22 : there are 2n2 coe¢ cients labelled d2;k ;
. at the coarsest scale 2J : there are 2nJ coe¢ cients labelled dJ;k and SJ;k .
In wavelet language, each of these coe¢ cients is called an "atom" and the
set of coe¢ cients for each scale are termed "crystals". The multiresolution
decomposition (MRD) of the variable or signal x(t) is then given by the set
of crystals: fSJ ; DJ ; DJ 1 ; :::; D1 g. The interpretation of the MRD using the
DWT is of interest as it relates to the frequency at which activity in the time
series occurs.
One major advantage a¤orded by the wavelet transform is the ability to per-
form natural local analysis of a time series in the sense that the length of wavelets
varies endogenously. It stretches into a long wavelet function to measure the
low frequency movements and it compresses into a short wavelet function to
measure the high frequency movements. In order to capture abrupt changes,
for example, one would like to have very short functions (narrow windows). At
the same time, in order to isolate slow and persistent movements, one would
like to have very long functions (wide windows). This is exactly what can be
achieved with the wavelet transform.
In sum, The main advantage of wavelet analysis is its ability to decompose
macroeconomic time series, and data in general, into their time scale compo-
nents. Moreover, because of the translation and scale properties, nonstationarity
in the data is not a problem when using wavelets and pre-…ltering is not needed.
Finally, as wavelets are constructed over …nite intervals of time and are not nec-
essarily homogeneous over time, they are localized in both time and scale. Two
interesting features of wavelet time scale decomposition arise: i) since the base
scale does not include any non-stationary components, the data need not be
detrended or di¤erenced, and ii) the nonparametric nature of wavelets takes
care of potential nonlinear relationships without losing detail (Schleicher, 2002,
Vuorenmaa, 2004, Gallegati and Gallegati, 2007).

2.2.1 Discrete Wavelet Transform

The wavelet transform decomposes a signal into sets of coe¢ cients where each
set of coe¢ cients is associated with a spatial scale and each coe¢ cient in a set
is associated with a particular location. The wavelet coe¢ cients, the output
of the wavelet transform, are obtained through a projection of the signal onto
shifted and translated versions of mother and father wavelets and represent,
respectively, the underlying smooth behavior of the data at the coarsest scale
(the scaling coe¢ cients) and the coarse scale deviations from it (the wavelet
coe¢ cients).
Given a stochastic process X = (x1 ; ::; xT ), or a time series, i.e. a vector of
observations from a stochastic process, the DWT is an orthogonal transforma-
tion of the data that operates via recursive …lters according to the pyramidal
algorithm. If N = 2j the algorithm produces scaling coe¢ cients at a coars-

7
est level J, describing global features of the data, and wavelet coe¢ cients at a
number of …ner scales 1; :::; J describing local features.
Let us denote with H = (h0 ; :::; hL 1 ) and G = (g0 ; :::; gL 1 ) the impulse
response sequence of the wavelet and scaling …lters hl , and gl , respectively, of
a Daubechies compactly supported wavelet (with L the width of the …lters).
Notice …rst that the impulse response sequence is the set of all …lter coe¢ cients,
LP1 LP1
that must satisfy the conditions: zero mean hl = 0, unit energy h2l = 1
l=0 l=0
LP1
2
and orthogonal to its even shifts hl hl+2k = 0. When N = L we may apply
l=0
the orthonormal discrete wavelet transform (DWT) and obtain the wavelet and
scaling coe¢ cients at the jth level de…ned as
L
X1
wj;t = hj;l Xt l (3)
l=0

L
X1
vj;t = gj;l Xt l (4)
l=0

where hj;l and gj;l are the level j wavelet and scaling …lters and, due to down-
sampling by 2J , we have 2NJ scaling and wavelet coe¢ cients.
The DWT is an orthogonal transformation of the data that operates via
recursive …lters according to the pyramidal algorithm (Mallat, 1989)., consist-
ing in an iterative scheme in which, at each iteration, the wavelet and scaling
coe¢ cients are computed from the scaling coe¢ cients of the previous iteration,
being the only exception at the unit level (j = 1) in which wavelet and scaling
…lters are applied to original data.
DWT has been widely applied to time series analysis in many disciplines (In
and Kim, 2006, BehradMehr, 2008, among others), but it has some drawbacks,
namely the dyadic length requirement (a sample size divisible by 2J ), and the
fact that the wavelet and scaling coe¢ cients are not shift invariant due to their
sensitivity to circular shifts because of the decimation operation. As such, an
alternative to DWT has emerged, represented by a non-orthogonal variant of
DWT: the maximal overlap DWT (MODWT).

2.2.2 Maximal Overlap DWT (MODWT)

In contrast to the DWT, the maximal overlap wavelet transform (Percival and
Walden, 2000) does not decimate the coe¢ cients and therefore the number of
scaling and wavelet coe¢ cients at every level of the transform is the same as the
number of sample observations. For this reason the MOWT is also called non-
decimated DWT, stationary DWT (Nason and Silverman, 1995), translation-
invariant DWT (Coifman and Donoho, 1995) and/or time-invariant DWT. In
this sense, the maximal overlap DWT coe¢ cients may be considered the result
of a simple modi…cation in the pyramid algorithm used in computing DWT
coe¢ cients through not downsampling the output at each scale and inserting

8
zeros between coe¢ cients in the wavelet and scaling …lters. Although it loses
orthogonality and e¢ ciency in computation, this transform does not have any
restriction on the sample size and it is shift invariant. Wavelet coe¢ cients and
scaling coe¢ cients are obtained as follows:
L 1
1 Xe
ej;t =
w hj;l Xt l (5)
2j=2 l=0

L 1
1 X
vej;t = gej;l Xt l (6)
2j=2 l=0

where the MODWT wavelet and scaling …lters e

hj;l and gej;l are obtained by
re-scaling the DWT …lters as follows:

e hj;l
hj;l = j=2 (7)
2
gj;l
gej;l = (8)
2j=2
As the MODWT wavelet …lter hj;l at each scale j approximates an ideal
1
high-pass with passband f 2 2j+1 ; 21j , spectral interpretation of the MODWT
wavelet coe¢ cients is done considering that j scale wavelet coe¢ cients are
associated to periods 2j ; 2j+1 .
The MODWT has some advantages over the DWT:
. provides the usual functions of the DWT such as multiresolution decom-
position analysis and variance analysis based on wavelet transform coe¢ cients;
. can handle any sample size;
. is translation invariant, as a shift in the signal does not change the pattern
of wavelet transform coe¢ cients;
. provides increased resolution at coarser scales;
. provides a larger sample size in the wavelet variance and correlation analy-
sis;
. produces a more asymptotically e¢ cient wavelet variance estimator than
the DWT.
Both Gençay, Selçuk and Whitcher (2002) and Percival and Walden (2000)
give a thorough and accessible description of the MODWT using matrix alge-
bra. With time series, one of the problems in using the MODWT is that the
calculations of crystals occurs at roughly half the length of the wavelet basis
into the series at any given scale. Thus the crystal coe¢ cients start further and
further along the time axis as the scale level increases. As the MODWT is shift
invariant, the MRD will not change with a circular shift in the time series, so
that each scale crystal can be appropriately shifted so that the coe¢ cients line
up with the original data. This is done by lagging the crystals by increasingly
large amounts as the scale order increases.

9
2.2.3 Wavelet variance analysis and correlation
Given that wavelet analysis can decompose a series into sets of crystals at various
scales, it is natural to then take each scale crystal and use it as a basis for
decomposing the variance of a given series into variances at di¤erent scales.
Wavelet transform is also able to analyze the variance of a stochastic process
and decompose it into components that are associated to di¤erent time scales.
In particular, given a stationary stochastic process fXg with variance 2X and
de…ned the level j wavelet variance 2X ( j ), the following relationship holds
1
X
2 2
X ( j) = X (9)
j=1

where 2X ( j ) represents the contribution to the total variability of the process

due to changes at scale j . This relationship says that wavelet variance decom-
poses the variance of a series into variances associated to di¤erent time scales.
Therefore, the wavelet variance decomposes the variance of certain stochastic
processes with respect to the scale j = 2j 1 just as the spectral density de-
compose the variance of the original series with respect to frequency f , that
is
1=2
Z
1
X
2
X ( j ) = varX = SX (f ) df (10)
j=1
1=2

where 2X ( j ) is wavelet variance at scale j and S(:) is the spectral density

function.
By de…nition, the time dependent wavelet variance for scale j , 2X ( j ), is
de…ned to be the variance of the j-level wavelet coe¢ cients
2 2
X ( j) ej;t
= var w (11)

Percival (1995) shows that being N Lj 0; an unbiased estimator of the

wavelet variance based on the MODWT may be obtained, after removing all
coe¢ cients a¤ected by the periodic boundary conditions, using
N
2 1 X 2
X ( j) = ej;t
w (12)
ej
N t=LJ

where N ej = N Lj + 1 is the number of maximal overlap coe¢ cients at scale j

and Lj = (2j 1) (L 1) + 1 is the length of the wavelet …lter for level j: Thus,
the jth scale level j wavelet variance is simply the variance of the nonboundary
or interior wavelet coe¢ cients at that level.
Both DWT and MODWT can decompose the sample variance of a time series
on a scale-by-scale basis via its squared wavelet coe¢ cients, but the MODWT-
based estimator has been shown by Percival (1995) to be superior to the DWT-
based estimator.

10
 Jensen (1999) shows that a wavelet based OLS-estimator is consistent when
the sample variance of the wavelet coe¢ cients is used in the regression. Using
the wavelet variance of the DWT coe¢ cients wj;t
j
2 1
1 X 2
~ 2X ( j) = j wj;k (13)
2
k=0

we get that
2 2 j(2d 1)
var fwj;t g = X ( j) ! 2 (14)
2
when j ! 1 (here is a …nite constant). By taking logarithms on both sides,
we obtain the approximate log-linear relationship
2 2
log X ( j) = log + (2d 1) log 2j (15)
The unknown d can then be estimated consistently by OLS regression by re-
placing 2X by its sample variance ~ 2X . Jensen (1999) shows that the wavelet
based OLS-estimator has smaller mean square error, and that the asymptotic
e¢ ciency of this estimator can be further improved by using the MODWT co-
e¢ cients instead of the DWT coe¢ cients.
Whitcher et al. (1998) developed a framework for applying a test for ho-
mogeneity of variance on a scale-by-scale basis to long memory processes. This
test was after summarized in Gençay, Selçuk and Whitcher (2002). The test
relies on the usual econometric assumption that the crystals of the coe¢ cients,
wj;t for scale j at time t have zero mean and variance 2X ( j ). This allows us
to formulate a null hypothesis of:
2 2 2
H0 : Lj ( j) = Lj+1 ( j) = ::: = N 1 ( j) (16)
against an alternative hypothesis of
2 2 2 2
HA : Lj ( j) = k ( j) 6= k+1 ( j) = ::: = N 1 ( j) (17)
where k is an unknown change point and Lj represents the initial coe¢ cient at
a given scale j once boundary coe¢ cients have been discarded. The assumption
is that the energy through the series builds up linearly over time, so that for
any crystal, if this is not the case, then the alternative hypothesis is true. The
test statistic used to test this is the D statistic, which was introduced by Inclan
and Tiao (1994) for the purpose of detecting a change in variance in time series.
De…ning Pk as:
P
k
wj2
j=1
Pk = (18)
P
N
wj2
j=1

b
and de…ning the D statistic as D = max(D+ ; D ) where D+ = L Pk and
D = Pk L b where Lb is the cumulative fraction of a given crystal coe¢ cient
to the total number of coe¢ cients in a given crystal.

11
 Covariance by scale can also be obtained using similar methods, so that
wavelet variances and covariances can be used together to obtain scale correla-
tions between series and con…dence intervals can be derived for the correlation
coe¢ cients by scale (see Whitcher, Guttorp and Percival, 2000).

2.3 Cross-wavelets
As pointed out before, interesting relations exist at di¤erent frequencies between
the series under analysis. Cross-wavelets analysis can be used to uncover some
of these relations, estimating the spectral characteristics of the time-series as
a function of time. In fact, some interesting relations may exist at di¤erent
frequencies and these type of relations are di¢ cult to uncover using time-domain
methods.
Cross wavelet tools generalize wavelet methods, allowing the analysis of time-
frequency dependencies between two time-series. Shows where the time series
share common power in time-frequency space. Therefore, while the wavelet
power spectrum depicts the variance of a time series, with times of large variance
showing large power, the cross-wavelet power of two time series depicts the
covariance between these time series at each scale or frequency.
The cross wavelet transform (CWT) of two time series xn and yn is de…ned
as W XY = W X W Y , where denotes complex conjugation. Let’s us de…ne
the cross wavelet power as W XY . The complex argument arg (W xy ) can be
interpreted as the local relative phase between xn and yn in time frequency
space. the theoretical distribution of the cross wavelet power of two time series
with background power spectra PkX and PkY is given in Torrence and Compo
(1998) as !
WnX (s) WnY (s) q
Zv (p)
D <p = PkX PkY (19)
X Y v

where Zv (p) is the con…dence level associated with the probability p for a pdf
de…ned by the square root of the product of two 2 distributions.
The phase for wavelets show any lag or lead relationships between compo-
nents, and is de…ned as
1
1 - S s
F WnXY (s)
n (s) = x;y = tan 1 W XY (s))i]
R [hS (s n

where -F and R are the imaginary and real parts, respectively, of the smooth
power spectrum.
Phase di¤erences are useful to characterize phase relationships between two
time series. A phase di¤erence of zero indicates that both time series move
together (analogous to positive covariance).
Cross-wavelet power reveals areas with high common power. Another useful
measure is how coherent the cross wavelet transform is in time frequency space.
Following Torrence and Compo (1998) we de…ne the wavelet coherence of two

12
time series as
1 2
S s WnXY (s)
Rn2 (s) =
1 2 2
S s jWnX (s)j :S s 1 jWnY (s)j

where S is a smoothing operator. This de…nition closely resembles that of a tra-

ditional correlation coe¢ cient, and it is useful to think of the wavelet coherence
as a localized correlation coe¢ cient in time frequency space. We may further
write the smoothing operator S as

S(W ) = Sscale (Stime (Wn (s)))

where Sscale denotes smoothing along the wavelet scale axis and Stime smoothing
in time. For the Morlet wavelet a suitable smoothing operator is given by
t2
Stime (W ) js = Wn (s) c12s2 js

and
Sscale (W )jn = Wn (s) c2 (0; 6s) jn
where c1 and c2 are normalization constants and is the rectangle function.
The factor of 0,6 is the empirically determined scale decorrelation length for
the Morlet wavelet (Torrence and Compo, 1998). In practice both convolutions
are done discretely and therefore the normalization coe¢ cients are determined
numerically.
The cross-wavelet coherence gives an indication of the correlation between
rotary components that are rotating in the same direction as a function of time
and periodicity. Coherence near one show a high similarity between the time
series, while coherence near zero show no relationship. It can be de…ned as the
ratio of the cross-spectrum to the product of the spectrum of each series, and
can be thought of as the local correlation between two CWTs.

2.4 Regression analysis

To improve our results and in order to investigate the inter-relationship among
all 11 stock markets, we also estimate simple regression models between each
pair, using the six di¤erent scales.
Spillovers are concerned with the e¤ects of any unexpected development in
one stock market to other markets. However, not only the high-frequency ‡uc-
tuation matters (as considered by Lee, 2004, and Sharkasi, Ruskin and Crane,
2005) as we will see in section 4. If we want to …gure out the International
transmission mechanism of "news" in stock markets all frequency ‡uctuations
should be taken into account.
Tables 1 to 7 at the appendix report the coe¢ cient estimates from a sequence
of least squares regressions using di¤erent scales of analysis obtained via the
multiresolution decomposition. As for the raw data of stock market prices, the
slope coe¢ cient is quite high for most of the cases and signi…cant for all.

13
3 Data and Descriptive Statistics
In this section we will describe all the data sets employed in this study. Summary
statistics, correlation and covariance analysis are presented next.

3.1 Data Description

The data used in the present analysis consists of the daily prices of stock mar-
ket indices for eleven markets, namely the DAX30 of Germany, the CAC40 of
France, the ATX20 of Austria, the IBEX35 of Spain, the FTSE100 of United
Kingdom (comprising the …ve European markets considered), the MerVal of Ar-
gentina, the Bovespa of Brazil (the two Latin American indices), the Nikkei225
of Japan, the Hang Seng of Hong Kong (the Asian indices sample), and from
the United States the Nasdaq Composite Index and the Dow Jones Industrial
Average30 (DJIA30).
Stock prices data were taken from Bloomberg and cover the period of 1
October 1997 to 6 March 2009, that has been adjusted given data availability.
We have considered these indices to be representative of these markets.

3.2 Descriptive Statistics

Time series plots in …gure 1 show that the stock indices of these markets appear
to display similar long-swing movements. The exception is the Bovespa index
which shows the most erratic behavior.
These stock market indices are analyzed in levels1 . There are several reasons
to justify the use of returns instead of levels2 . However, we are only concerned,
at the time, with daily index levels (daily prices) behavior. Note that these
daily prices on a given calendar day may represent prices realized over di¤erent
time intervals depending on holiday and trading day schedules. Moreover, the
main advantage of wavelet analysis is its ability to decompose macroeconomic
time series, and data in general, into their time scale components. Because
of the translation and scale properties, nonstationarity in the data is not a
problem when using wavelets and pre…ltering is not needed. And this is the
main justi…cation for us to be using daily prices instead of returns in the present
work3 .

Figure 1: The daily prices for all series, covering their complete data span.
1 Ongoing research is proceeding to compare the daily rates of return, by calculating con-

tinuously compounded daily index returns by Daily Return = Rt = ln(Pt =Pt 1 ), where Pt is
the closing price of the index at time t and Pt 1 is the closing price at time t-1, with levels
to see if conclusions change.
2 As each market uses its local currency for presenting the index values, the daily returns

may be a better choice. Also because these stock markets are operating in di¤erent time zones
with di¤erent holidays and trading day schedules as well as di¤erent opening and closing times.
3 An ongoing research is being prepared to see if results change using both prices and

returns.

14
 x 10
4 INDICES

9 FTSE..04-Apr-1984
DAX30..06-Jan-1981
XETRA..26-Mar-2003
8 IBEX35..02-Jan-1995
ATX..13-Nov-1992
CAC40..05-Mar-1990
7 S&P500..03-Mar-2006
DJIA30..05-Jan-1950
NASDAQ..09-Feb-1971
6 Nikkei225..06-Jan-1984
HangSeng..05-Jan-1987
MerVal..10-Oct-1996
5 Bovespa..29-Apr-1993

1960 1970 1980 1990 2000

The summary statistics of daily prices is presented in table 1. In all cases, the
excess kurtosis and skewness measures are indicative of evidence against normal
distribution. Time series plot in …gure 1 also show the typical phenomena of
volatility clustering in stock prices. We can also see that the Brazilian market
shows the highest variability as measured by the standard deviation of prices,
which is also noticed by the erratic behavior observed in …gure1.

Table 1: Descriptive statistics of the daily prices of the stock market indices
under analysis

On the other hand, the MerVal market index (Argentina) displays less
volatility than other markets, whilst it exhibits also less average daily prices.

15
Such features are in accordance with the conventional wisdom of low risk and
low return. Moreover, the sample means of the prices of all indices are positive.
Only the FTSE and Nikkei indices are signi…cantly negative skewed.
Table 2 presents the correlation matrix between all eleven stock market
indices under analysis. As we can see, European indices are more correlated with
other European markets (exception is with ATX), with the DJIA and NASDAQ
indices, and with the Asian ones, but they have the smallest correlation with
the Latin American indices than with the other American ones (they even show
the lowest correlation with the NASDAQ and Nikkei indices).

Table 2: Cross-correlation analysis among the eleven stock index prices under
analysis

The Nasdaq index shows the lowest correlation with the ATX, and the Latin
American ones. In sum, the less developed markets show lowest correlation
values with the more developed ones, and the more developed markets show
higher correlation values with the most developed ones. Thus, the results of
the cross-correlation analysis of the stock index prices under analysis indicate
that these stock markets do exhibit a signi…cant degree of integration with each
other in accordance with Sharkasi, Ruskin and Crane (2005) and Rua and Nunes
(2009).

4 Empirical Results
In this section we present the results obtained by applying the DWT, the
MODWT and the cross-wavelets techniques to the daily data series under con-
sideration. However, in order to perform a wavelet analysis of a time series, a
number of decisions must be made before: which family of wavelet …lters to use,
what type of wavelet transform to apply, and how boundary conditions at the
end of the series are to be handled.

16
4.1 Time-scale Decomposition
From …gures 1 to 11 at the appendix we show the discrete wavelet transform
decomposition. There are clear indications of e¤ects from regionwide markets as
well as from worldwide markets and this picture is more detailed when we look
at the results of the wavelet analysis. The energy percentages described by each
wavelet component for the daily prices of the eleven market indices are given
in …gures 1 to 11 at the appendix, which show that the …rst two/three high
frequency components (d1, d2 and d3) explain the higher part of the energy
of these series, implying that movements in the series are mainly caused by
short-term ‡uctuations. These plots represent the discrete wavelet transform
(DWT) for the daily prices of UK, France, Germany, Spain, Austria, EUA
(NASDAQ and DJIA), Argentina, Brazil, Japan and Hong Kong stock markets.
As mentioned, it can be seen that the …rst and the second wavelet components
(d1 and d2), mostly, together account for most of the variations in the price
series. In the last graph of each …gure we can see both the original series and
the reconstructed series summing up all d components as the a6 component. As
it is shown, the matching is not completely perfect but very close to it (they are
almost indistinguishable since the red line - the original series - almost turns
indi¤erent to the blue one - the approximation).
In order to analyze if the pattern of comovement across the index equity
markets is time-scale dependent, we investigate the relationship among stock
market prices at di¤erent time scales using wavelet analysis, as it enables us
to separate a signal into multiresolution components. We decompose the daily
stock market index price series of the eleven countries into their time-scale
components using the maximal overlap discrete wavelet transform (MODWT)
which is a non-orthogonal variant of the classical discrete wavelet transform
analyzed above.
We apply the non-decimated discrete wavelet transform to the daily stock
index price series for the eleven markets accomplished using the Daubechies
least asymmetric (LA) wavelet …lter of length L=8, that is LA(8), which is a
fourth order …lter based on four non-zero coe¢ cients (Daubechies, 1992) as the
order of the …lter is equal to the number of vanishing moments (half the length
of the …lter). The application of the translation invariant wavelet transform
with a number of scales J=6 produces six vectors of wavelet …lter coe¢ cients
d6, d5, d4, d3, d2, d1 and one vector of scaling coe¢ cients a6. As the MODWT
wavelet …lter belongs to high-pass …lter with passband given by the frequency
interval 1=2j+1 ; 1=2j for scales 1 j J, inverting the frequency range to
produce a period of time we obtain, with daily data, that wavelet coe¢ cients
associated to scale j = 2j 1 are associated to periods 2j ; 2j+1 . Thus, scale
1 represents frequencies corresponding to 2-4 days period dynamics, and scales
2, 3, 4, 5 and 6 correspond to 4-8, 8-16, 16-32, 32-64 and 64-128 day period
dynamics, respectively. The …rst 3 time scales represent the short-run dynamics
of a signal (corresponding to very high and high frequency components), scales
4 through 6 correspond to the lower frequency components.
In …gures 12 through 22 at the appendix we report the multiresolution de-

17
composition of the daily stock index prices of the eleven stock market indices.
These …gures show the plot of the wavelet coe¢ cient vectors from the high-
frequency, d1, to the low frequency, d6, variations. Here the …nest scale d1
represents short-term variations due to shocks occurring within two to four
days, and the next …nest component accounts for variations at a time scale of
4 to 8 days. Such observation indicates that movements in stock markets are
mainly caused by short-term ‡uctuations. In fact, such phenomenon is some-
what expected as stock market prices cannot be predictable in advance. For all
markets we can see that the high volatility is clearly depicted in high-frequency
‡uctuations (d1 and d2, and in most cases also d3).
If the price movements of one stock market a¤ect subsequent price move-
ments in other markets, then the innovations of the in‡uential market should
lead to subsequent changes in the other markets. Being the UK market one of
the most in‡uential in the world, we will mainly focus our empirical part con-
cerning cross-wavelets examining whether innovations in the UK stock market
are transmitted to the other markets4 . However, …gures 23 to 32 at the ap-
pendix show the plot of the wavelet cross-correlation coe¢ cients plot, between
the FTSE index and all the other indices under consideration. These …gures
show the plot of the wavelet cross-correlation coe¢ cient vectors from the high-
frequency, d1, to the low frequency, d6, variations. Results will be discussed in
the following subsection.
To investigate further the inter-relationships among the eleven stock mar-
kets, we estimate simple regression models between pairs, using all di¤erent
scales. To save space we only present the results between the FTSE index
and all the return series under analysis, and after, the DJIA versus Nikkei and
MerVal indices and the Nikkei versus MerVal and DAX indices. Results are
presented in tables 1 to 7 at the appendix and will be discussed in the following
subsection.

4.2 Price Spillovers

In table 2 we have presented the correlations between all eleven indices. At
that time we have already discussed the in‡uences exerted among international
markets. European indices where showed to be more correlated with other Eu-
ropean markets (exception is with ATX) with the DJIA and NASDAQ indices,
and with the Asian ones, but they have the smallest correlation with the Latin
American indices than with the other American ones (they even show the lowest
correlation with the NASDAQ and Nikkei indices). The Nasdaq index shows
the lowest correlation with the ATX, and the Latin American ones. Thus, the
results of the cross-correlation analysis of the stock index prices under analysis
indicate that these stock markets do exhibit a signi…cant degree of integration
with each other in accordance with Sharkasi, Ruskin and Crane (2005) and Rua
and Nunes (2009)5 .
4 It was also due to reasons of saving space, ad because we believe that FTSE will be

representative. However, results will be provided upon request.

5 At least for the markets used in accordance with our study.

18
 Figures 23 to 32 at the appendix show the plot of the wavelet cross-correlation
coe¢ cients plot, between the FTSE index and all the other indices under con-
sideration. These …gures show the plot of the wavelet cross-correlation coe¢ -
cient vectors from the high-frequency, d1, to the low frequency, d6, variations.
Cross wavelet tools generalize wavelet methods, allowing the analysis of time-
frequency dependencies between two time-series. Shows where the time series
share common power in time-frequency space. Therefore, while the wavelet
power spectrum depicts the variance of a time series, with times of large vari-
ance showing large power, the cross-wavelet power of two time series depicts
the covariance between these time series at each scale or frequency. In those
…gures the x axis represents the time lag and the y axis the volume of energy, or
in other words the correlation intensity. As we should expect, in stock market
indices closer geographically (like the European ones) the level of energy is much
stronger at the zero lag measured in the x axis. We must have in mind that if
the series were absolutely related in the 0 lag we should observe a spike which
will go until the intensity level 1, and this means that no more waves at the
lag behavior should be observed. For the highest frequencies (represented the
lowest time spans; 2 to 8 days) the adjustments are less evident. As an example,
lets consider …gures 26 (FTSE vs ATX) and 30 (FTSE vs Bovespa). As already
argued before, the FTSE market is more correlated to the European ones than
with the Latin America markets. This is also evidenced by these plots since
the adjustments at the lower frequency (d6) are made with a highest intensity
level of 0,6 between the UK and Austria markets but with an intensity level of
just 0,4 between UK and Brazil. In sum, country speci…c phenomenons are not
rapidly transmitted to other markets, some show a clear delay in transmissions.
However, phase di¤erences are also useful to characterize phase relationships
between two time series, since these can be viewed as the position in the pseudo-
cycle of the series. A phase di¤erence of zero indicates that the time series move
together (analogous to positive covariance). If we consider two series x and y
and being the phase di¤erence de…ned by , if 2 2 ; 2 then the series move
in-phase, with the time series y leading x if 2 2 0 : On the other hand, if
;
2 0; 2 then it is x that is leading. We have an anti-phase relation (analogous
to negative covariance) if 2 ( 2 ; ] [ ( ; 2 ]: In this case, if 2 ( 2 ; ) then x
is leading and if 2 ( ; 2 ) the y time-series leads. In our case it is di¢ cult
to say exactly which series is leading which since we have not considered, for
now, the di¤erent time periods that can be analyzed separately. But for the
time we can say that there are di¤erent time periods where each of the series
assumes the lead position at di¤erent time frequencies and with di¤erent energy
levels. This is also being considered in a current work.
From the results (R2 and p-values of slopes) in tables 1 to 7 at the appendix,
it can be seen that there are strong comovement between the UK, German,
French, Spain, Japan and United Sates. It also seems clear that the values for
each pair of regressions that directional in‡uence seems to be clockwise. Possible
explanations may be on the basis of this global interdependence and circular
spillover e¤ects, as also argued by Sharkasi, Ruskin and Crane (2005). One of

19
these is the fact that spillover e¤ects are noticeable on the markets which open
next, but these e¤ects become less marked for the next global cohort. However,
many …rms with shares in these stock indices are international investors and
these must be aware that there is global absorption of major events or large
changes in worldwide markets.
It is also noticed that the nearest markets are those more correlated with each
other, and as such they even show the highest R2 and the highest correlation
coe¢ cients, when such adjustments increase. Although there are di¤erences
in the frequency components, as showed in tables 1 to 7 at the appendix, at
the lower frequency variations (d4 to d6), these di¤erences are not so strong, as
those reported by the high-frequency levels (d1 to d3), since these capture short-
run phenomenon (more localized), since a great part of the risk factors between
these are common to these stock market indices geographically closer and for
more apart stock market indices, although with both common factors a¤ecting
them, the risk factors a¤ecting these are felt in a more soft manner. This makes
us question the role of regional vs worldwide crashes and their e¤ects on world
stock markets interactions. For example, the markets of South America and
Europe are more distant geographically from each other and table 2 shows us
the lower values of R2 when compared to the results obtained from tables 1, 3
and 4. Also we can see that the FTSE market is more correlated to the other
European markets, as measured by the highest R2 with the exception being
given by the Austrian market. Speci…c temporal factors are captured through
the highest frequencies, d1 to d3, as in most of the cases (see tables 1 through
7 at the appendix) the R2 values for these are lower, increasing when we move
from the higher frequencies (2 to 4 and 4 to 8 days) to the lowest ones (32 to
64 and 64 to 128 days). We may not forget that there are di¤erent temporal
levels and in level d6, for example, possible adjustments are made in longer time
periods.
The Asian markets appear to be more correlated with the European markets
than with the Latin America ones (see table 7), but less correlated with the
EUA markets than the European ones. Once again the fact geography playing
an important role. We may also take some lessons from here and predict that in
the face of some market problem in Asia, Europe will be a¤ected …rst than the
EUA markets, but only after the Latin American countries will su¤er the same
impact. With respect to EUA shocks, these will impact …rst the Latin American
countries, only after the European ones and at the end the Asian stock market
indices. With respect to UK, it is strongly a¤ected by the Japanese market (not
so much by the Hong Kong stock market) and by the closest geographically
European countries. The EUA market also exerts a strong e¤ect in the UK
stock market, but the South America countries do not exert such pressure in
the UK stock market.
However, our results are not in line with those previous empirical …ndings
that innovations in the US and UK stock markets are rapidly transmitted to
other markets. For this let’s us analyze carefully the relationships between the
…nest components (d1) in stock markets. The estimates of the slope coe¢ cient
is severely a¤ected, although remains statistically signi…cant. Since these …nest

20
scales capture movements in 2 to 8 days (because the next …nest scale (d2) has
a fairly large portion of energy in stock price movements as evidenced by the
previous analysis realized to …gures 1 to 11 at the appendix), we may argue
that only with a considerable time span (the lowest frequencies - 32 to 128 days
meaning d5 and d6) spillovers are transmitted to the other markets, given that
the estimates of the slope coe¢ cients for the lowest frequency are statistically
signi…cant and R2 values increase as we approach these lower frequencies. These
results contradict those obtained by Lee (2004) where he argues that the most
important impact in spillovers will be captured by the higher frequencies (d1
and d2). Given our results the importance of historical transmissions is low for
the period under analysis (1997-2009) which is in accordance to the …ndings of
Sharkasi, Ruskin and Crane (2005) who pointed out the fact that the importance
of historical transmissions has decreased since the beginning of this century.
The determination of diversi…cation strategies by an international investor
also depends on the nature and magnitude of the relationships existing between
di¤erent stock markets. As such, it is important for international investors to
understand the interrelations among the various markets to diversify risk and
to derive high return, and with these results we hope to provide good strategies
for individual market investor’s to compose their international stock portfolios.

5 Conclusion
Wavelet analysis is a comparatively new and powerful mathematical tool for
signal processing. The DWT and MODWT techniques have been employed
in this work together with the more recent technique CWT, since cross-wavelet
power of two time series depicts the covariance between these time series at each
scale or frequency. By examining the relationships between high-frequency and
low frequency ‡uctuations in stock markets, obtained from the reconstruction
of the data by di¤erent components, we were able to investigate international
transmission of news and spillovers across stock markets around the world.
Some interesting observations can be pointed out from our empirical analysis.
First, our results are not in line with those previous empirical …ndings that
innovations in the US and UK stock markets are rapidly transmitted to other
markets. Secondly, the Asian markets appear to be more correlated with the
European markets than with the Latin America ones (see table 7), but less
correlated with the EUA markets than the European ones. Once again the fact
geography playing an important role. We may also take some lessons from here
and predict that in the face of some market problem in Asia, Europe will be
a¤ected …rst than the EUA markets, but only after the Latin American countries
will su¤er the same impact. With respect to EUA shocks, these will impact …rst
the Latin American countries, only after the European ones and at the end the
Asian stock market indices. With respect to UK, it is strongly a¤ected by
the Japanese market (not so much by the Hong Kong stock market) and by the
closest geographically European countries. The EUA market also exerts a strong
e¤ect in the UK stock market, but the South America countries do not exert

21
such pressure in the UK stock market. These adjustments are clockwise and
should be taken into account by international stock market indices investors
in their portfolio composition. Finally, as evidenced by the CWT and least
squares regression analysis, countries more distant in geographic terms exhibit
a lower intensity level of energy with respect to those situated at an higher
distance, reinforcing the idea that the closer the market the higher the impact,
although impacts are only re‡ected in lower frequency levels corresponding to an
higher daily span separating the spillover e¤ects. As such, the CWT technique
improves upon the others in terms of allowing for a better understanding of
the series comovement at di¤erent frequencies. The …ndings suggest that there
is strong to moderate cointegration among many stock markets, and as such
there is evidence of intra-continental relationships. However, the importance of
historical transmissions is low for the period under analysis.
The present work may be extended in several ways. First of all, the result
that geographically closer markets show higher R2 values and highest cross-
correlation coe¢ cients, both in levels and in the lower frequency components
indicate that temporary crashes and other market disturbances will be more
spread out among these than to those at higher distances. The opposite also
occurs and an important empirical investigation, under analysis at this moment,
makes us wonder how di¤erent slowdowns, booms, expansions, recessions, crises,
or other types of temporary market disturbances may have an impact on the
results. Moreover, as a consequence of the increased integration, business cycles
synchronization and stock returns correlations are expected to raise over time
and across countries. As such, the analysis may also be divided into di¤erent
time periods. The CWT technique may gives us considerable advantage to
perform this analysis since we will be able to see which stock market indices lead
or lag the other considering di¤erent time sub samples estimates, and the time it
toke for the impact through the di¤erent frequencies analyzed. A second way is
to expand the analysis to more stock market indices to correct for some biases in
considering these as the representative markets, and be able to answer with more
caution to the question of comovement between nearest neighbor markets. A
third way is to explore the question of changes in results using prices or returns,
since our results are similar to those obtained by Sharkasi, Ruskin and Crane
(2005) and Rua and Nunes (2009), where they use returns instead of prices.
Finally, the inclusion of more market indices in the analysis would be useful
to explore our geographic in‡uence result and clockwise cycle in detail. For
example, Portugal and Brazil (among others) are distant in geographical terms
but establish a very close relationship, what has been happening for several
years.

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Appendix
Figure 1 to 11: DWT decomposition for all the stock index markets under
analysis (one …gure for each).

Figure 1
FTSE :Level-6 approximation FTSE :Level-6 detail

200
6000

5000 0

4000 -200
1998 2000 2002 2004 2006 2008 1998 2000 2002 2004 2006 2008
FTSE :Level-5 detail FTSE :Level-4 detail

200 100
0 0
-100
-200
-200
1998 2000 2002 2004 2006 2008 1998 2000 2002 2004 2006 2008
FTSE :Level-3 detail FTSE :Level-2 detail
200
200
100
0 0
-100 -200
1998 2000 2002 2004 2006 2008 1998 2000 2002 2004 2006 2008
FTSE :Level-1 detail FTSE :Unfiltered series

100 6000
0 5000
-100 4000

1998 2000 2002 2004 2006 2008 1998 2000 2002 2004 2006 2008

Figure 2

26
 DAX30 :Level-6 approximation DAX30 :Level-6 detail
8000 400

200
6000
0
4000
-200
1998 2000 2002 2004 2006 2008 1998 2000 2002 2004 2006 2008
DAX30 :Level-5 detail DAX30 :Level-4 detail
200
200
0 0

-200 -200

1998 2000 2002 2004 2006 2008 1998 2000 2002 2004 2006 2008
DAX30 :Level-3 detail DAX30 :Level-2 detail
200
200
0 0

-200 -200
1998 2000 2002 2004 2006 2008 1998 2000 2002 2004 2006 2008
DAX30 :Level-1 detail DAX30 :Unfiltered series
8000
100
6000
0
-100 4000
-200
1998 2000 2002 2004 2006 2008 1998 2000 2002 2004 2006 2008

Figure 3
CAC40 :Level-6 approximation CAC40 :Level-6 detail

6000 200
5000
0
4000
3000 -200
1998 2000 2002 2004 2006 2008 1998 2000 2002 2004 2006 2008
CAC40 :Level-5 detail CAC40 :Level-4 detail

200 200

0 0

-200 -200
1998 2000 2002 2004 2006 2008 1998 2000 2002 2004 2006 2008
CAC40 :Level-3 detail CAC40 :Level-2 detail
200 200

0 0

-200 -200
1998 2000 2002 2004 2006 2008 1998 2000 2002 2004 2006 2008
CAC40 :Level-1 detail CAC40 :Unfiltered series

100 6000

0
4000
-100
1998 2000 2002 2004 2006 2008 1998 2000 2002 2004 2006 2008

Figure 4

27
 4
x 10 IBEX35 :Level-6 approximation IBEX35 :Level-6 detail

1.4 500
1.2
0
1
0.8 -500
0.6
1998 2000 2002 2004 2006 2008 1998 2000 2002 2004 2006 2008
IBEX35 :Level-5 detail IBEX35 :Level-4 detail
500 500

0 0

-500 -500
1998 2000 2002 2004 2006 2008 1998 2000 2002 2004 2006 2008
IBEX35 :Level-3 detail IBEX35 :Level-2 detail
600 500
400
200 0
0
-200
-400 -500
1998 2000 2002 2004 2006 2008 1998 2000 2002 2004 2006 2008
IBEX35 :Level-1 detail 4 IBEX35 :Unfiltered series
x 10

200 1.4
1.2
0 1
-200 0.8
0.6
1998 2000 2002 2004 2006 2008 1998 2000 2002 2004 2006 2008

Figure 5
ATX :Level-6 approximation ATX :Level-6 detail
200
4000
3000 0
2000
-200
1998 2000 2002 2004 2006 2008 1998 2000 2002 2004 2006 2008
ATX :Level-5 detail ATX :Level-4 detail
200
100
0 0
-100
-200
1998 2000 2002 2004 2006 2008 1998 2000 2002 2004 2006 2008
ATX :Level-3 detail ATX :Level-2 detail
100
100
0 0
-100 -100

1998 2000 2002 2004 2006 2008 1998 2000 2002 2004 2006 2008
ATX :Level-1 detail ATX :Unfiltered series
100
4000
0
2000
-100
1998 2000 2002 2004 2006 2008 1998 2000 2002 2004 2006 2008

Figure 6

28
 NASDAQ :Level-6 approximation NASDAQ :Level-6 detail
4000
200
3000 0
-200
2000 -400

1998 2000 2002 2004 2006 2008 1998 2000 2002 2004 2006 2008
NASDAQ :Level-5 detail NASDAQ :Level-4 detail
200
200
0
0
-200
-200
1998 2000 2002 2004 2006 2008 1998 2000 2002 2004 2006 2008
NASDAQ :Level-3 detail NASDAQ :Level-2 detail
200
100
100
0
0
-100 -100

1998 2000 2002 2004 2006 2008 1998 2000 2002 2004 2006 2008
NASDAQ :Level-1 detail NASDAQ :Unfiltered vs Recomposed series

100 4000
0
-100 2000

1998 2000 2002 2004 2006 2008 1998 2000 2002 2004 2006 2008

Figure 7
4 DJIA30 :Level-6 approximation DJIA30 :Level-6 detail
x 10
500
1.2
0
1

0.8 -500
1998 2000 2002 2004 2006 2008 1998 2000 2002 2004 2006 2008
DJIA30 :Level-5 detail DJIA30 :Level-4 detail
500
200
0 0
-200
-500 -400
1998 2000 2002 2004 2006 2008 1998 2000 2002 2004 2006 2008
DJIA30 :Level-3 detail DJIA30 :Level-2 detail
500
200
0 0
-200
-500
1998 2000 2002 2004 2006 2008 1998 2000 2002 2004 2006 2008
DJIA30 :Level-1 detail 4
xDJIA30
10 :Unfiltered vs Recomposed series
1.4
200 1.2
0
1
-200
0.8
-400
1998 2000 2002 2004 2006 2008 1998 2000 2002 2004 2006 2008

Figure 8

29
 MerVal :Level-6 approximation MerVal :Level-6 detail

2000 100
1500
0
1000
500 -100
1998 2000 2002 2004 2006 2008 1998 2000 2002 2004 2006 2008
MerVal :Level-5 detail MerVal :Level-4 detail
100 100

0
0
-100
-100
1998 2000 2002 2004 2006 2008 1998 2000 2002 2004 2006 2008
MerVal :Level-3 detail MerVal :Level-2 detail
50
50
0 0

-50 -50
1998 2000 2002 2004 2006 2008 1998 2000 2002 2004 2006 2008
MerVal :Level-1 detail MerVal :Unfiltered vs Recomposed series
50
2000
0 1500
1000
-50 500
1998 2000 2002 2004 2006 2008 1998 2000 2002 2004 2006 2008

Figure 9
4
x 10 Bovespa :Level-6 approximation Bovespa :Level-6 detail

6
2000
4
0
2
-2000
1998 2000 2002 2004 2006 2008 1998 2000 2002 2004 2006 2008
Bovespa :Level-5 detail Bovespa :Level-4 detail

2000 2000

0 0

-2000 -2000

1998 2000 2002 2004 2006 2008 1998 2000 2002 2004 2006 2008
Bovespa :Level-3 detail Bovespa :Level-2 detail

2000 2000

0 0

-2000 -2000

1998 2000 2002 2004 2006 2008 1998 2000 2002 2004 2006 2008
Bovespa :Level-1 detail 4
xBovespa
10 :Unfiltered vs Rec omposed series
2000
6
0 4
-2000 2

1998 2000 2002 2004 2006 2008 1998 2000 2002 2004 2006 2008
Figure 10

30
 4
x 10 Nikkei225 :Level-6 approximation Nikkei225 :Level-6 detail

1.8
500
1.6
1.4 0
1.2 -500
1
0.8 -1000
1998 2000 2002 2004 2006 2008 1998 2000 2002 2004 2006 2008
Nikkei225 :Level-5 detail Nikkei225 :Level-4 detail
500
500
0 0

-500 -500
1998 2000 2002 2004 2006 2008 1998 2000 2002 2004 2006 2008
Nikkei225 :Level-3 detail Nikkei225 :Level-2 detail

500 500

0 0

-500 -500
1998 2000 2002 2004 2006 2008 1998 2000 2002 2004 2006 2008
Nikkei225 :Level-1 detail 4
Nikkei225 :Unfiltered vs Recomposed series
x 10
400 2
200
0 1.5
-200
-400 1

1998 2000 2002 2004 2006 2008 1998 2000 2002 2004 2006 2008

Figure 11
4
x 10 HangSeng :Level-6 approximation HangSeng :Level-6 detail

2.5 1000

2 0
1.5
-1000
1
1998 2000 2002 2004 2006 2008 1998 2000 2002 2004 2006 2008
HangSeng :Level-5 detail HangSeng :Level-4 detail

1000 1000

0 0

-1000 -1000
1998 2000 2002 2004 2006 2008 1998 2000 2002 2004 2006 2008
HangSeng :Level-3 detail HangSeng :Level-2 detail
1000
500
0 0
-500
-1000
-1000
1998 2000 2002 2004 2006 2008 1998 2000 2002 2004 2006 2008
HangSeng :Level-1 detail 4
HangSeng :Unfiltered vs Recomposed series
x 10
3
500
2
0
-500 1
1998 2000 2002 2004 2006 2008 1998 2000 2002 2004 2006 2008

Figure 12 through 22: The MODWT coe¢ cients sequences plot for levels j=
to j=6, for all stock market indices (one for each)

Figure 12

31
 Level 1 Wavelet Coefficients: FTSE

100
0
-100
-200
1998 2000 2002 2004 2006 2008
Level 2 Wavelet Coefficients: FTSE
100
0
-100
-200
1998 2000 2002 2004 2006 2008
Level 3 Wavelet Coefficients: FTSE

100
0
-100
1998 2000 2002 2004 2006 2008
Level 4 Wavelet Coefficients: FTSE
200
100
0
-100
1998 2000 2002 2004 2006 2008
Level 5 Wavelet Coefficients: FTSE
200
0
-200
1998 2000 2002 2004 2006 2008
Level 6 Wavelet Coefficients: FTSE
200
0
-200
1998 2000 2002 2004 2006 2008

Figure 13
Level 1 Wavelet Coefficients: DAX30
100
0
-100
-200
1998 2000 2002 2004 2006 2008
Level 2 Wavelet Coefficients: DAX30
200
0
-200
1998 2000 2002 2004 2006 2008
Level 3 Wavelet Coefficients: DAX30
200
0
-200
1998 2000 2002 2004 2006 2008
Level 4 Wavelet Coefficients: DAX30
200
0
-200
1998 2000 2002 2004 2006 2008
Level 5 Wavelet Coefficients: DAX30
200
0
-200
-400
1998 2000 2002 2004 2006 2008
Level 6 Wavelet Coefficients: DAX30
200
0
-200
-400
1998 2000 2002 2004 2006 2008

Figure 14

32
 Level 1 Wavelet Coefficients: CAC40
100
0
-100
1998 2000 2002 2004 2006 2008
Level 2 Wavelet Coefficients: CAC40
100
0
-100
1998 2000 2002 2004 2006 2008
Level 3 Wavelet Coefficients: CAC40
100
0
-100
1998 2000 2002 2004 2006 2008
Level 4 Wavelet Coefficients: CAC40
200
0
-200
1998 2000 2002 2004 2006 2008
Level 5 Wavelet Coefficients: CAC40
200
0
-200
1998 2000 2002 2004 2006 2008
Level 6 Wavelet Coefficients: CAC40
200
0
-200
1998 2000 2002 2004 2006 2008
Figure 15
Level 1 Wavelet Coefficients: IBEX35

200
0
-200
-400
1998 2000 2002 2004 2006 2008
Level 2 Wavelet Coefficients: IBEX35
400
200
0
-200
-400
1998 2000 2002 2004 2006 2008
Level 3 Wavelet Coefficients: IBEX35
500
0
-500
1998 2000 2002 2004 2006 2008
Level 4 Wavelet Coefficients: IBEX35
400
200
0
-200
-400
1998 2000 2002 2004 2006 2008
Level 5 Wavelet Coefficients: IBEX35
400
200
0
-200
-400
1998 2000 2002 2004 2006 2008
Level 6 Wavelet Coefficients: IBEX35
500
0
-500
-1000
1998 2000 2002 2004 2006 2008

Figure 16

33
 Level 1 W avelet Coeffic ients : A T X
100
0
-100
1998 2000 2002 2004 2006 2008
Level 2 W avelet Coeffic ients : A T X

100
0
-100
1998 2000 2002 2004 2006 2008
Level 3 W avelet Coeffic ients : A T X
100
0
-100
1998 2000 2002 2004 2006 2008
Level 4 W avelet Coeffic ients : A T X

100
0
-100
1998 2000 2002 2004 2006 2008
Level 5 W avelet Coeffic ients : A T X

100
0
-100
1998 2000 2002 2004 2006 2008
Level 6 W avelet Coeffic ients : A T X
200
0
-200
1998 2000 2002 2004 2006 2008

Figure 17
Level 1 Wavelet Coefficients: NASDAQ
100
0
-100
1998 2000 2002 2004 2006 2008
Level 2 Wavelet Coefficients: NASDAQ

100
0
-100
1998 2000 2002 2004 2006 2008
Level 3 Wavelet Coefficients: NASDAQ

100
0
-100
-200
1998 2000 2002 2004 2006 2008
Level 4 Wavelet Coefficients: NASDAQ
100
0
-100
-200
1998 2000 2002 2004 2006 2008
Level 5 Wavelet Coefficients: NASDAQ
200
0
-200
1998 2000 2002 2004 2006 2008
Level 6 Wavelet Coefficients: NASDAQ
400
200
0
-200
-400
1998 2000 2002 2004 2006 2008

Figure 18

34
 Level 1 Wavelet Coefficients: DJIA30

200
0
-200

1998 2000 2002 2004 2006 2008

Level 2 Wavelet Coefficients: DJIA30
200
0
-200
1998 2000 2002 2004 2006 2008
Level 3 Wavelet Coefficients: DJIA30

200
0
-200
-400
1998 2000 2002 2004 2006 2008
Level 4 Wavelet Coefficients: DJIA30
400
200
0
-200
-400
1998 2000 2002 2004 2006 2008
Level 5 Wavelet Coefficients: DJIA30
400
200
0
-200
-400
1998 2000 2002 2004 2006 2008
Level 6 Wavelet Coefficients: DJIA30
400
200
0
-200
-400
1998 2000 2002 2004 2006 2008

Figure 19
Level 1 Wavelet Coefficients: MerVal
50
0
-50
1998 2000 2002 2004 2006 2008
Level 2 Wavelet Coefficients: MerVal
40
20
0
-20
-40
-60
1998 2000 2002 2004 2006 2008
Level 3 Wavelet Coefficients: MerVal
50
0
-50
-100
1998 2000 2002 2004 2006 2008
Level 4 Wavelet Coefficients: MerVal
100
0
-100
1998 2000 2002 2004 2006 2008
Level 5 Wavelet Coefficients: MerVal
100
50
0
-50
1998 2000 2002 2004 2006 2008
Level 6 Wavelet Coefficients: MerVal
100
0
-100
1998 2000 2002 2004 2006 2008

Figure 20

35
 Level 1 Wavelet Coefficients: Bovespa
2000
0
-2000
1998 2000 2002 2004 2006 2008
Level 2 Wavelet Coefficients: Bovespa
2000
0
-2000
1998 2000 2002 2004 2006 2008
Level 3 Wavelet Coefficients: Bovespa
2000
0
-2000
1998 2000 2002 2004 2006 2008
Level 4 Wavelet Coefficients: Bovespa
2000
0
-2000
1998 2000 2002 2004 2006 2008
Level 5 Wavelet Coefficients: Bovespa
2000
0
-2000
1998 2000 2002 2004 2006 2008
Level 6 Wavelet Coefficients: Bovespa
2000
0
-2000
1998 2000 2002 2004 2006 2008

Figure 21
Level 1 W avelet Coeffic ients : Nikkei225
400
200
0
-200
-400
1998 2000 2002 2004 2006 2008
Level 2 W avelet Coeffic ients : Nikkei225
500
0
-500
1998 2000 2002 2004 2006 2008
Level 3 W avelet Coeffic ients : Nikkei225
500
0
-500
1998 2000 2002 2004 2006 2008
Level 4 W avelet Coeffic ients : Nikkei225
500
0
-500
1998 2000 2002 2004 2006 2008
Level 5 W avelet Coeffic ients : Nikkei225
500
0
-500
1998 2000 2002 2004 2006 2008
Level 6 W avelet Coeffic ients : Nikkei225
500
0
-500
-1000
1998 2000 2002 2004 2006 2008

Figure 22

36
 Level 1 W avelet Coeffic ients : HangSeng

500
0
-500
-1000
1998 2000 2002 2004 2006 2008
Level 2 W avelet Coeffic ients : HangSeng
500
0
-500
-1000
1998 2000 2002 2004 2006 2008
Level 3 W avelet Coeffic ients : HangSeng
1000
0
-1000
1998 2000 2002 2004 2006 2008
Level 4 W avelet Coeffic ients : HangSeng
1000
500
0
-500
1998 2000 2002 2004 2006 2008
Level 5 W avelet Coeffic ients : HangSeng
1000
0
-1000
1998 2000 2002 2004 2006 2008
Level 6 W avelet Coeffic ients : HangSeng

1000
0
-1000
1998 2000 2002 2004 2006 2008

Figures 23 to 32: Wavelet cross-correlation analysis between the FTSE index

and all the other indices under analysis for levels j=1 to j=6 (one for each)

Figure 23

Level 1 W avelet Cros s -Correlation: FT SE vs DAX 30

0.6
0.4
0.2
0
-0.2
-1000 -800 -600 -400 -200 0 200 400 600 800 1000
Level 2 W avelet Cros s -Correlation: FT SE vs DAX 30
0.6
0.4
0.2
0
-0.2
-0.4
-1000 -800 -600 -400 -200 0 200 400 600 800 1000
Level 3 W avelet Cros s -Correlation: FT SE vs DAX 30
0.5
0
-0.5
-1000 -800 -600 -400 -200 0 200 400 600 800 1000
Level 4 W avelet Cros s -Correlation: FT SE vs DAX 30

0.5
0
-0.5
-1000 -800 -600 -400 -200 0 200 400 600 800 1000
Level 5 W avelet Cros s -Correlation: FT SE vs DAX 30

0.5
0
-0.5
-1000 -800 -600 -400 -200 0 200 400 600 800 1000
Level 6 W avelet Cros s -Correlation: FT SE vs DAX 30
0.5
0
-0.5
-1000 -800 -600 -400 -200 0 200 400 600 800 1000

37
 Figure 24
Level 1 Wavelet Cross-Correlation: FTSE vs CAC40
0.8
0.6
0.4
0.2
0
-0.2
-1000 -800 -600 -400 -200 0 200 400 600 800 1000
Level 2 Wavelet Cross-Correlation: FTSE vs CAC40
0.8
0.6
0.4
0.2
0
-0.2
-0.4
-1000 -800 -600 -400 -200 0 200 400 600 800 1000
Level 3 Wavelet Cross-Correlation: FTSE vs CAC40

0.5
0
-0.5
-1000 -800 -600 -400 -200 0 200 400 600 800 1000
Level 4 Wavelet Cross-Correlation: FTSE vs CAC40

0.5
0
-0.5
-1000 -800 -600 -400 -200 0 200 400 600 800 1000
Level 5 Wavelet Cross-Correlation: FTSE vs CAC40

0.5
0
-0.5
-1000 -800 -600 -400 -200 0 200 400 600 800 1000
Level 6 Wavelet Cross-Correlation: FTSE vs CAC40

0.5
0
-0.5
-1000 -800 -600 -400 -200 0 200 400 600 800 1000

Figure 25
Level 1 Wavelet Cross-Correlation: FTSE vs IBEX35
0.6
0.4
0.2
0
-0.2
-1000 -800 -600 -400 -200 0 200 400 600 800 1000
Level 2 Wavelet Cross-Correlation: FTSE vs IBEX35
0.6
0.4
0.2
0
-0.2
-0.4
-1000 -800 -600 -400 -200 0 200 400 600 800 1000
Level 3 Wavelet Cross-Correlation: FTSE vs IBEX35
0.5
0
-0.5
-1000 -800 -600 -400 -200 0 200 400 600 800 1000
Level 4 Wavelet Cross-Correlation: FTSE vs IBEX35
0.6
0.4
0.2
0
-0.2
-0.4
-1000 -800 -600 -400 -200 0 200 400 600 800 1000
Level 5 Wavelet Cross-Correlation: FTSE vs IBEX35
0.6
0.4
0.2
0
-0.2
-1000 -800 -600 -400 -200 0 200 400 600 800 1000
Level 6 Wavelet Cross-Correlation: FTSE vs IBEX35
0.6
0.4
0.2
0
-0.2
-0.4
-1000 -800 -600 -400 -200 0 200 400 600 800 1000

Figure 26

38
 Level 1 Wavelet Cross-Correlation: FTSE vs ATX

0.4
0.2
0
-0.2
-1000 -800 -600 -400 -200 0 200 400 600 800 1000
Level 2 Wavelet Cross-Correlation: FTSE vs ATX
0.4
0.2
0
-0.2
-1000 -800 -600 -400 -200 0 200 400 600 800 1000
Level 3 Wavelet Cross-Correlation: FTSE vs ATX
0.4
0.2
0
-0.2
-1000 -800 -600 -400 -200 0 200 400 600 800 1000
Level 4 Wavelet Cross-Correlation: FTSE vs ATX
0.4
0.2
0
-0.2
-1000 -800 -600 -400 -200 0 200 400 600 800 1000
Level 5 Wavelet Cross-Correlation: FTSE vs ATX
0.4
0.2
0
-0.2
-0.4
-1000 -800 -600 -400 -200 0 200 400 600 800 1000
Level 6 Wavelet Cross-Correlation: FTSE vs ATX
0.6
0.4
0.2
0
-0.2
-1000 -800 -600 -400 -200 0 200 400 600 800 1000

Figure 27
Level 1 Wavelet Cross-Correlation: FTSE vs NASDAQ
0.2
0
-0.2
-1000 -800 -600 -400 -200 0 200 400 600 800 1000
Level 2 Wavelet Cross-Correlation: FTSE vs NASDAQ
0.4
0.2
0
-0.2
-1000 -800 -600 -400 -200 0 200 400 600 800 1000
Level 3 Wavelet Cross-Correlation: FTSE vs NASDAQ
0.4
0.2
0
-0.2
-0.4
-1000 -800 -600 -400 -200 0 200 400 600 800 1000
Level 4 Wavelet Cross-Correlation: FTSE vs NASDAQ
0.4
0.2
0
-0.2
-1000 -800 -600 -400 -200 0 200 400 600 800 1000
Level 5 Wavelet Cross-Correlation: FTSE vs NASDAQ
0.6
0.4
0.2
0
-0.2
-0.4
-1000 -800 -600 -400 -200 0 200 400 600 800 1000
Level 6 Wavelet Cross-Correlation: FTSE vs NASDAQ
0.4
0.2
0
-0.2
-0.4
-1000 -800 -600 -400 -200 0 200 400 600 800 1000

Figure 28

39
 Level 1 W avelet Cros s -Correlation: FT SE vs DJ IA 30

0.2
0
-0.2
-1000 -800 -600 -400 -200 0 200 400 600 800 1000
Level 2 W avelet Cros s -Correlation: FT SE vs DJ IA 30
0.6
0.4
0.2
0
-0.2
-1000 -800 -600 -400 -200 0 200 400 600 800 1000
Level 3 W avelet Cros s -Correlation: FT SE vs DJ IA 30
0.5
0
-0.5
-1000 -800 -600 -400 -200 0 200 400 600 800 1000
Level 4 W avelet Cros s -Correlation: FT SE vs DJ IA 30
0.6
0.4
0.2
0
-0.2
-0.4
-1000 -800 -600 -400 -200 0 200 400 600 800 1000
Level 5 W avelet Cros s -Correlation: FT SE vs DJ IA 30
0.5
0
-0.5
-1000 -800 -600 -400 -200 0 200 400 600 800 1000
Level 6 W avelet Cros s -Correlation: FT SE vs DJ IA 30
0.6
0.4
0.2
0
-0.2
-0.4
-1000 -800 -600 -400 -200 0 200 400 600 800 1000

Figure 29
Level 1 W avelet Cros s -Correlation: FT SE vs MerVal
0.3
0.2
0.1
0
-0.1
-1000 -800 -600 -400 -200 0 200 400 600 800 1000
Level 2 W avelet Cros s -Correlation: FT SE vs MerVal

0.2
0
-0.2
-1000 -800 -600 -400 -200 0 200 400 600 800 1000
Level 3 W avelet Cros s -Correlation: FT SE vs MerVal
0.4
0.2
0
-0.2
-1000 -800 -600 -400 -200 0 200 400 600 800 1000
Level 4 W avelet Cros s -Correlation: FT SE vs MerVal
0.4
0.2
0
-0.2
-1000 -800 -600 -400 -200 0 200 400 600 800 1000
Level 5 W avelet Cros s -Correlation: FT SE vs MerVal
0.4
0.2
0
-0.2
-1000 -800 -600 -400 -200 0 200 400 600 800 1000
Level 6 W avelet Cros s -Correlation: FT SE vs MerVal

0.2
0
-0.2
-1000 -800 -600 -400 -200 0 200 400 600 800 1000

Figure 30

40
 Level 1 Wavelet Cross-Correlation: FTSE vs Bovespa

0.2
0
-0.2
-1000 -800 -600 -400 -200 0 200 400 600 800 1000
Level 2 Wavelet Cross-Correlation: FTSE vs Bovespa
0.4
0.2
0
-0.2
-1000 -800 -600 -400 -200 0 200 400 600 800 1000
Level 3 Wavelet Cross-Correlation: FTSE vs Bovespa
0.4
0.2
0
-0.2
-1000 -800 -600 -400 -200 0 200 400 600 800 1000
Level 4 Wavelet Cross-Correlation: FTSE vs Bovespa
0.4
0.2
0
-0.2
-0.4
-1000 -800 -600 -400 -200 0 200 400 600 800 1000
Level 5 Wavelet Cross-Correlation: FTSE vs Bovespa
0.4
0.2
0
-0.2
-0.4
-1000 -800 -600 -400 -200 0 200 400 600 800 1000
Level 6 Wavelet Cross-Correlation: FTSE vs Bovespa
0.4
0.2
0
-0.2
-1000 -800 -600 -400 -200 0 200 400 600 800 1000

Figure 31
Level 1 Wavelet Cross-Correlation: FTSE vs Nikkei225
0.2
0
-0.2
-1000 -800 -600 -400 -200 0 200 400 600 800 1000
Level 2 Wavelet Cross-Correlation: FTSE vs Nikkei225
0.4
0.2
0
-0.2
-1000 -800 -600 -400 -200 0 200 400 600 800 1000
Level 3 Wavelet Cross-Correlation: FTSE vs Nikkei225
0.4
0.2
0
-0.2
-1000 -800 -600 -400 -200 0 200 400 600 800 1000
Level 4 Wavelet Cross-Correlation: FTSE vs Nikkei225
0.4
0.2
0
-0.2
-1000 -800 -600 -400 -200 0 200 400 600 800 1000
Level 5 Wavelet Cross-Correlation: FTSE vs Nikkei225
0.4
0.2
0
-0.2
-1000 -800 -600 -400 -200 0 200 400 600 800 1000
Level 6 Wavelet Cross-Correlation: FTSE vs Nikkei225
0.4
0.2
0
-0.2
-1000 -800 -600 -400 -200 0 200 400 600 800 1000

Figure 32

41
 Level 1 Wavelet Cross-Correlation: FTSE vs HangSeng
0.2
0
-0.2
-1000 -800 -600 -400 -200 0 200 400 600 800 1000
Level 2 Wavelet Cross-Correlation: FTSE vs HangSeng
0.4
0.2
0
-0.2
-1000 -800 -600 -400 -200 0 200 400 600 800 1000
Level 3 Wavelet Cross-Correlation: FTSE vs HangSeng
0.6
0.4
0.2
0
-0.2
-0.4
-1000 -800 -600 -400 -200 0 200 400 600 800 1000
Level 4 Wavelet Cross-Correlation: FTSE vs HangSeng
0.6
0.4
0.2
0
-0.2
-0.4
-1000 -800 -600 -400 -200 0 200 400 600 800 1000
Level 5 Wavelet Cross-Correlation: FTSE vs HangSeng
0.6
0.4
0.2
0
-0.2
-0.4
-1000 -800 -600 -400 -200 0 200 400 600 800 1000
Level 6 Wavelet Cross-Correlation: FTSE vs HangSeng
0.6
0.4
0.2
0
-0.2
-0.4
-1000 -800 -600 -400 -200 0 200 400 600 800 1000

Tables 1 to 7: Regression analysis between the daily returns of FTSE and

all the other ten markets, between DJIA and the Nikkei and MerVal markets,
and also between the Nikkei and MerVal markets and the DAX stock market
index

Table 1

Table 2

42
Table 3

Table 4

43
Table 5

Table 6

44
Table 7

45