Revisiting the International Stock Price Synchronicity Issue

Abstract

This paper examines the issue of disparity in international stock price synchronicity. Some studies have shown that stock prices in countries that have poor track records of government protection of private property right tend to move more synchronously. Investors in these countries expend little effort to extract firm-specific information, thus causing price to be driven mainly by market-wide information. However, such information hypothesis has been challenged by new literature arguing that price synchronicity may be related to information efficiency in a more complicated way, or not at all. We attempt to ask the question if the negative relationship between price synchronicity and level of country property right protection could be explained by factors other than the information hypothesis. Using empirical data covering 40 countries over the period from 1995 to 2012, we show that after controlling for a number of structural variables and robust checking, both stock market volatility and firm size invariably have significant impacts on price synchronicity of stocks in every country. The capitalization effect is subtle and is apparent only at a disaggregated level of the economies across countries. We provide an alternative and complementary reason why the R2 disparity occurs internationally by suggesting a non-information based explanation that has to do more with corporate and industry structures of integrations. A capitalization index is constructed, which is less coarse than the Herfindahl indexes, to capture the effects of industry compositions and intra-industry firm correlations. This index is able to explain cross-sectional variations in price synchronicity as well as variations in R2 over time. It is shown that tighter industry integration leads to higher R2, and under this explanation, the property rights factor becomes insignificant.