Assessing the International Comovement of Equity Returns
The international comovement of equity returns has been viewed as reflecting either pervasive common shocks or local linkages between countries. This paper brings these perspectives together by assessing the comovement of equity returns in a dynami...
| Main Authors: | , |
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| Format: | Working Paper |
| Language: | English |
| Published: |
World Bank, Washington, DC
2018
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/443411531314807821/Assessing-the-international-comovement-of-equity-returns http://hdl.handle.net/10986/29989 |
| Summary: | The international comovement of equity
returns has been viewed as reflecting either pervasive
common shocks or local linkages between countries. This
paper brings these perspectives together by assessing the
comovement of equity returns in a dynamic model that allows
for both common factors and spatial dependence, using
quarterly data for 40 advanced and emerging countries over
the past two decades, and including GDP growth, the real
interest rate, and credit as fundamental variables.
Estimation results employing a bias-corrected quasi-maximum
likelihood approach provide strong indication that the
cross-country dependence of equity returns results from both
spatial effects and common shocks captured by a latent
common factor -- weak and strong dependence, respectively.
The factor exhibits a robust negative correlation with
market measures of aggregate risk. Countries' exposure
to the common factor rises with their extent of trade
openness and the degree of rigidity of their exchange rate
regime. Despite its simplicity, the empirical model fits the
data well. All these results are robust to the use of
alternative spatial weight matrices. The paper also shows
that ignoring cross-country dependence leads to distorted
parameter estimates and a marked deterioration of the
explanatory power of the empirical model. |
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