Proposal: Does Institutional Ownership Matter for International Stock Return Comovement?

Abstract

The study of the determinants of stock return comovements is central to the international finance literature. In a classical contribution, Heston and Rouwenhorst (1994) argue that country-specific factors are more important drivers of volatility than cross-country industry factors. While international capital and trade barriers have fallen in the last decades, many other studies confirm these findings (Griffin and Karolyi (1998), Rouwenhorst (1999), Bekaert, Hodrick and Zhang (2009), among others). In this paper, we directly examine the increasing role of institutional investors, which invest worldwide, as potential agents of financial globalization. We test whether the rise of institutional investors as shareholders of corporations worldwide has been associated with increased cross-country correlations. For this purpose, we use new 2001-2010 data from FactSet/LionShares with portfolio holdings from over 5,700 institutions in over 20,000 stocks in 49 countries, with positions exceeding a total of US$18 trillion as of December 2010. As these professional investors pursue more industry or global focused portfolio strategies, we expect that asset pricing factors become more integrated across country boundaries. Thus, we test whether global and industry factors matter more for firms with higher institutional ownership, and conversely country factors matter less. We expect to find that the effect to be stronger for stocks held by foreign-based institutions which, by definition, exhibit less “home bias” (French and Poterba (1991)). The overall objective of this research project is to examine whether cross-border portfolio investment by institutional investors is a force of international capital markets integration.