Working Paper: CEPR ID: DP7013
Authors: Dennis Quinn; Hans-Joachim Voth
Abstract: Using a new dataset on capital account openness, we investigate why equity return correlations changed over the last century. Based on a new, long-run dataset on capital account regulations in a group of 16 countries over the period 1890-2001, we show that correlations increase as financial markets are liberalized. These findings are robust to controlling for both the Forbes-Rigobon bias and global averages in equity return correlations. We test the robustness of our conclusions, and show that greater synchronization of fundamentals is not the main cause of increasing correlations. These results imply that the home bias puzzle may be smaller than traditionally claimed.
Keywords: diversification; equity return correlations; home bias
JEL Codes: F21; G15; G18; N20; P16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| capital account openness (F30) | equity return correlations (G12) |
| capital account openness (F30) | stock market correlations (G10) |
| regulatory changes (G18) | equity return correlations (G12) |
| capital account openness (F30) | changes in equity market correlations (C10) |
| home bias puzzle (F12) | international diversification (F29) |