Abstract
This study explores empirically the fundamental factors that influence intraday and overnight cross country stock return covariances. Using the Institute for Study of Securities Markets (ISSM) transactions data from 1988 to 1992, we construct overnight and intraday returns for a portfolio of Japanese stocks using their NYSE-traded American Depository Receipts and a matched-sample portfolio of U.S. stocks. A simple valuation framework is developed to examine cross-country correlations of returns and to discriminate between competitive and global information shocks to future expected and unexpected dividends and discount rates. We find that U.S. macroeconomic news announcements, shocks to the yen/dollar foreign exchange rate and Treasury bill returns and industry effects have no measurable influence on U.S. and Japanese return correlations. However, large shocks to broad-based market indexes (Nikkei Stock Average and Standard and Poor's 500 Stock Index) positively impact both the magnitude and persistence of the return correlations. The implications for international diversification strategies are discussed.
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