Working Paper: CEPR ID: DP18330
Authors: Raphael Auer; Bruce Iwadate; Andreas Schrimpf; Alexander F. Wagner
Abstract: Although real integration conceptually plays an important role for the comovement of international equity markets, documenting this link empirically has proven challenging. We construct a new dataset of theory-guided, relevant measures of bilateral trade in final and intermediate goods and services. With these measures, we provide evidence of a strong link between changes in international trade – in particular global value chains – and equity market comovement. These results suggest that supply chain disruptions and reshoring, for instance due to political tensions, war, and the COVID-19 crisis, might affect the interconnections between stock markets via rippling through the global production network.
Keywords: Financial Integration; Global Value Chains; International Asset Pricing; International Trade; Spillovers; Real Integration
JEL Codes: F10; F36; F65; G10; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| changes in global value chains (F69) | influence equity market correlations (G19) |
| disruptions in supply chains (F69) | shifts in stock market interconnections (F60) |
| negative demand shocks in one country (F41) | decreased profits and stock prices in another country (F69) |
| decreased profits and stock prices in another country (F69) | inducing comovement in their stock markets (F29) |
| higher trade intensity (F19) | increased stock market comovement (G10) |