Country Risk: The Significance of the Country Factor for Share-Price Movements in the United Kingdom, Germany, and Japan

In another place I have shown that share prices in the equity markets of the United States, United Kingdom, Germany, and Japan do behave as if there exists one multinational equity market.' Share prices in the non-U.S. countries were shown to be related to, and affected by, the price changes in the U.S. equity market. This, however, does not rule out the possibility that share prices in each national component of the market move together in addition to the market-wide movements. The purpose of this paper is to measure and describe those share-price fluctuations associated uniquely with their country of origin, and then, on the basis of those price changes, to identify and estimate the country factor in share-price movements in the equity markets of the United Kingdom, Germany, and Japan. In this paper the position is taken that each of the non-U.S. markets has a character of its own as a geopolitical entity, but this does not necessarily mean that the world market must therefore be segmented. This argument is similar to the one that the existence of different industries in the United States does not negate the possibility of the functioning of one American equity market.