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

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  • Quinn, Dennis
  • Voth, Hans-Joachim

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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Bibliographic Info

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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Keywords: diversification; equity return correlations; home bias;

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References

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Cited by:
  1. Stijn Claessens & M. Ayhan Kose & Marco E. Terrones, 2010. "Financial Cycles: What? How? When?," NBER Chapters, in: NBER International Seminar on Macroeconomics 2010, pages 303-343 National Bureau of Economic Research, Inc.
  2. Marco Terrones & M. Ayhan Kose & Stijn Claessens, 2011. "Financial Cycles," IMF Working Papers 11/76, International Monetary Fund.

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