Working Paper: CEPR ID: DP6519
Authors: Pedro Morgado; Jos Tavares
Abstract: In this paper we analyze the determinants of co-movements in stock returns among 40 developed and emerging markets, from the 1970s to the 1990s. We provide empirical estimates of the impact of bilateral indicators of economic integration such as bilateral trade intensity, the dissimilarity of export structures, the asymmetry of output growth and bilateral real exchange rate volatility. We find that each indicator has the expected effect on the correlation of stock returns: trade intensity increases the correlation of stock returns, while real exchange rate volatility, the asymmetry of output growth and the degree of export dissimilarity decrease it. We also find that countries with more developed and more analogous institutions - in terms of either rule of law or civil liberties - display a higher correlation of stock returns.
Keywords: bilateral trade intensity; comovement of stock returns; economic integration; real exchange rate volatility
JEL Codes: E44; F15; F36; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| bilateral trade intensity (F10) | correlation of stock returns (G17) |
| real exchange rate volatility (F31) | correlation of stock returns (G17) |
| asymmetry of output growth (O41) | correlation of stock returns (G17) |
| dissimilarity of export structures (F14) | correlation of stock returns (G17) |
| institutional development (O17) | correlation of stock returns (G17) |