Cross-market Correlations Research Articles

Country and industry factors in returns: evidence from emerging markets’ stocks

This study examines the influence of country and industry factors on the cross-sectional variance and correlation structure of returns. I use new data on emerging markets’ stocks obtained from the Emerging Markets Data Base. I find that emerging markets’ returns are mainly driven by country factors, as it was shown previously in studies for mature markets, and that cross-market correlation is not affected by the industrial composition of the indices. These results have important implications in regard to international portfolio diversification: cross-market diversification seems to be a better bet than cross-industry diversification. A finer industry partition shows, however, that ignoring the industrial mix leads to an important loss of diversification benefits.

Country and Industry Factors in Returns - Evidence from Emerging Markets' Stocks

This study examines the influence of country and industry factors on the cross-sectional variance and correlation structure of returns. I use new data on emerging markets' stocks obtained from the Emerging Markets Data Base. I find that emerging markets' returns are mainly driven by country factors, as it was shown previously in studies for mature markets, and that cross-market correlation is not affected by the industrial composition of the indices. These results have important implications in regard to international portfolio diversification: cross-market diversification seems to be a better bet than cross-industry diversification. A finer industry partition shows, however, that ignoring the industrial mix leads to an important loss of diversification benefits.

Foreign Portfolio Equity Investments in Economic Development

.Hence, in this paper, we reassess the benefits and costs of FPIs from the perspective of the recipients byintegrating the theoretical literature with available empirical evidence, by providing new evidence, and byputting forward new concepts. After a brief discussion of the role of capital markets in economic development,we present evidence on contribution of emerging markets towards resource allocation and mobilization and therelationship between market development and growth. Next, we provide an in-depth analysis of thedevelopmental role ofFPIs. Specifically, we discuss the various FPI contributions and present empirical evidence regarding the relationship betweenFPIs and market development, degree of capital market integration, cost of capital, cross-market correlation and market volatility. It is clear that the evidence onbenefits of FPIs is strong, whereas the policy concerns regarding resource mobilization, market co-movements,contagion and volatility expressed by policy makers and some academics are largely unwarranted. Finally, wemake some policy suggestions regarding preconditions for capital market openings, market regulation, andliberalization sequencing in the hope that they would help towards preventing future crisis.*Bank of Montreal Chair in Finance and Banking, McGill University, Faculty of Management,1001 Sherbrooke Street West, Montreal, Canada H3A 1G5. I am grateful to John Boyd, Peter Christoffersen,Darius Miller, Michel Robe and participants at the Columbia University conferenceon ,Is Globalization of Capital Markets a Boost or Hindrance to Development?, for insightful comments. I thank Hyunchul Chung forresearch assistance, SSHRC for financial support and International Finance Corporation for providing data onemerging markets.Correspondence: errunza@management.mcgill.ca

After-Hours Stock Prices and Post-Crash Hangovers

After-hours pricing in foreign equity markets of multiple-listed U.S. securities appeared to be efficient in predicting New York prices in the weeks immediately following the October 1987 crash but relatively uninformative in succeeding months. By contrast, daily changes in New York prices appear to be efficiently incorporated in after-hours trading on both the Tokyo and London exchanges throughout the sample period. This paper suggests that the asymmetry and temporal variations in cross-market correlations are consistent with rational investor behavior in equity markets with nonzero transaction costs and time-varying share price volatility. IN THE WAKE OF the October 1987 crash, a number of studies have provided evidence of significant international linkages among national equity markets where high-frequency movements in the share price indices of national exchanges appear to induce sympathetic price movements in subsequent trading on other national exchanges.' However, the cross-market correlations are generally much larger in periods of extreme volatility and appear to subside to modest or even negligible associations during periods of more normal trading activity. Since the constituent stocks of national exchange indices are not identical, it may be that the episodic increases in correlated movements of the indices are due to changes in the actual (or perceived) relative importance of common factors in periods of unusual volatility. The thrust of this paper is to remove the issue of the disparate composition of the price indices of national exchanges by examining the prices of a set of