This paper examines the behavior of European Community stock markets in light of decreased barriers to internatinal investments and improved accessibility to information. The Vector Autoregression (VAR) model is able to identify the main channels of interactions and simulate the responses of a given market to innovations in other markets. The daily returns are expressed in terms of German Marks, reflecting the outlook of European investors. This paper hypothesizes that an innovation in one market is directly, rather than serially, transmitted to all other markets.
The research shows that no market is found to be completely isolated from ther others; however, these patterns of transmittal are still consistent with international market efficiency.