Abstract
In light of rapidly increasing foreign equity liability positions of emerging market economies, we test for a necessary condition of international risk sharing, namely for systematic patterns between idiosyncratic output fluctuations and financial market developments. Panel analysis of 22 emerging market economies shows strong evidence for pro-cyclicality of capital gains on domestic stock markets both over short-term and medium-term horizons. This implies that domestic output fluctuations can be hedged through cross-border ownership of financial markets. Copyright © 2012 John Wiley & Sons, Ltd.
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