Working Paper: CEPR ID: DP5598
Authors: Rui Albuquerque; Clara Vega
Abstract: We analyze the effect that real-time domestic and foreign news about fundamentals have on the correlation of stock returns of a small open economy, Portugal, and a large open economy, the U.S. We also study the role of public and private information in the price formation process in the U.S. and Portuguese stock markets. First, and consistent with our theoretical model, we find that U.S. macroeconomic news and Portuguese earnings news do not affect the cross-country stock market correlation, whereas Portuguese macroeconomic news lowers the cross-country stock market correlation. Second, we find that U.S. public information affects Portuguese stock market returns, but this effect is diminished when U.S. stock market returns are included in the regression; we provide evidence in the paper that this effect does not derive from contagion as commonly accepted. Finally, public information news in the U.S. is associated with increased liquidity, while the effect in Portugal depends on the type of news releases.
Keywords: Contagion; Information Spillovers; International Equity Returns; Private Information; Public News Announcements
JEL Codes: F3; G12; G14; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| U.S. macroeconomic news (E39) | cross-country stock market correlation (C10) |
| Portuguese macroeconomic news (E69) | cross-country stock market correlation (C10) |
| U.S. public information (H54) | Portuguese stock market returns (G17) |
| U.S. stock market returns (G17) | Portuguese stock market returns (G17) |
| U.S. public information (H54) | liquidity in both markets (G19) |
| Portuguese macroeconomic news (E69) | liquidity (E41) |