A global look into stock market comovements

Abstract

By investigating the developments and determinants of the dependence of domestic stock returns on latent global factors for 37 advanced and emerging countries during 1996–2015, this article illuminates contemporary trends in international finance with implications to the potential gains from international portfolio diversification and the independent effect of domestic monetary policy. There were upward time-trends in the dependences in the majority of the countries and at a global level, suggesting steady advances of international stock market integration or gradual declines of the potential gains from diversifying a stock portfolio internationally. The integration was greater in advanced countries than in emerging ones while progressing more rapidly in emerging countries than in advanced ones, suggesting relative attractiveness of emerging markets as an investment destination. An indication of a global financial cycle is that the degree of the dependences for different country groups changed over time in a similar fashion. Differences in those dependences across the countries and those over time were explained by the openness of international trade, the size of domestic stock market, and policies of monetary authorities: the level of short-term interest rates, the openness of the capital account, and the variability of foreign exchange rates. In that cycle, there emerged a dilemma between the mobility of international portfolio stock investments and the independent effect of domestic interest-rate policy over not only the sample period but also in the run-up to the 2008 crisis, as far as nominal short-term interest-rate differentials with respect to the United States were concerned.