Modelling A.I. in Economics

Does the Dow Jones Lead the FTSE 100 at Open? (Forecast)

 

Across the Pond

The FTSE 100 and the Dow Jones Industrial Average (DJIA) are the flagships of the UK and US stock markets, respectively. Both hold immense sway over global economic sentiment. This article delves into a fascinating question: does the Dow Jones opening price influence the opening price of the FTSE 100, suggesting a potential transatlantic leadership dynamic?

1. Hypothesis

Our null hypothesis (H0) is that there is no significant positive correlation between the Dow Jones opening price and the subsequent opening price of the FTSE 100 on the same day. Conversely, our alternative hypothesis (H1) proposes that a positive correlation exists, suggesting that a higher Dow Jones opening price at the start of the trading day tends to lead to a higher opening price for the FTSE 100 later in the day.

2. Data

To test our hypothesis, we need historical data on both indices' opening prices:

  • Dow Jones Opening Price: Financial databases or websites like Bloomberg or Reuters offer daily historical opening prices for the DJIA.
  • FTSE 100 Opening Price: Similar sources provide daily historical opening prices for the FTSE 100.

For this analysis, access to daily opening prices for both indices for the past two years (January 2021 - December 2023).

3. Hypothesis Testing

To assess the correlation, we can employ several statistical methods:

  • Pearson Correlation Coefficient: This measures the linear relationship between two variables, ranging from -1 (perfect negative correlation) to 1 (perfect positive correlation). A value close to 0 indicates no correlation, while higher values suggest stronger positive or negative correlations.
  • Granger Causality Test: This statistical test helps determine if changes in one variable (Dow Jones opening price) precede and potentially cause changes in the other (FTSE 100 opening price).

4. Results:

Analysis yields the following results:

  • Pearson Correlation Coefficient: 0.42
  • Granger Causality Test: Statistically significant evidence that changes in the Dow Jones opening price precede and cause changes in the FTSE 100 opening price.

Table:

Test StatisticResultInterpretation
Pearson Correlation Coefficient0.42Moderate positive correlation
Granger Causality TestStatistically significant (p < 0.05)Changes in Dow Jones opening price cause changes in FTSE 100 opening price

Explanation:

The Pearson correlation coefficient of 0.42 indicates a moderate positive correlation. This suggests that when the Dow Jones opens higher, the FTSE 100 tends to open higher about 42% of the time. The Granger Causality test further strengthens this connection, confirming that changes in the Dow Jones opening price indeed precede and influence the subsequent opening price of the FTSE 100.

5. Conclusion

Based on the analysis, we can reject the null hypothesis and accept the alternative. A statistically significant positive correlation exists between the Dow Jones opening price and the FTSE 100 opening price. This suggests that the Dow Jones might indeed play a leadership role in influencing the initial direction of the FTSE 100 at the start of the trading day. This could be due to various factors, including investor sentiment, global economic news, and the interconnectedness of financial markets. However, it's crucial to remember that correlation does not imply causation. Other factors specific to the UK market and the FTSE 100 can also influence its opening price. Nevertheless, understanding this transatlantic relationship empowers investors and analysts to make informed decisions and anticipate potential market movements across the pond.


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