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Free Flows, Limited Diversification: Explaining the Fall and Rise of Stock Market Correlations, 1890-2001

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Author Info
Quinn, Dennis
Voth, Hans-Joachim

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Abstract

Using a new dataset on capital account openness, we investigate why equity return correlations changed over the last century. Based on a new, long-run dataset on capital account regulations in a group of 16 countries over the period 1890-2001, we show that correlations increase as financial markets are liberalized. These findings are robust to controlling for both the Forbes-Rigobon bias and global averages in equity return correlations. We test the robustness of our conclusions, and show that greater synchronization of fundamentals is not the main cause of increasing correlations. These results imply that the home bias puzzle may be smaller than traditionally claimed.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7013.

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Date of creation: Oct 2008
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Handle: RePEc:cpr:ceprdp:7013

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Related research
Keywords: diversification; equity return correlations; home bias;

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Find related papers by JEL classification:
F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
N20 - Economic History - - Financial Markets and Institutions - - - General, International, or Comparative
P16 - Economic Systems - - Capitalist Systems - - - Political Economy of Capitalism

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