Working Paper: CEPR ID: DP5955
Authors: Geert Bekaert; Robert J. Hodrick; Xiaoyan Zhang
Abstract: We examine international stock return comovements using country-industry and country-style portfolios. We first establish that parsimonious risk-based factor models capture the covariance structure of the data better than the popular Heston-Rouwenhorst (1994) model. We then establish the following stylized facts regarding stock return comovements. First, we do not find evidence for an upward trend in return correlations, excpet for the European stock markets. Second, the increasing imporatnce of industry factors relative to country factors was a short-lived, temporary phenomenon. Third, we find no evidence for a trend in idiosyncratic risk in any of the countries we examine.
Keywords: comovements; correlation; dynamics; country debate; factor models; international diversification
JEL Codes: C52; G11; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| model choice (C52) | understanding comovements (F29) |
| country factors (O57) | return correlations (C10) |
| industry factors (L19) | return correlations (C10) |
| idiosyncratic risk (D81) | firm-level risks (G32) |