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The rise in comovement across national stock markets: market integration or IT bubble?

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  • Robin Brooks
  • Marco Del Negro

Abstract

A stylized fact in the portfolio diversification literature is that diversifying across countries is more effective than diversifying across industries in terms of risk reduction. But with the rise in comovement across national stock markets since the mid-1990s, this no longer appears to be true. We explore whether this change is driven by global integration and therefore likely to be permanent, or if it is a temporary phenomenon associated with the recent stock market bubble. Our results point to the latter hypothesis. In the aftermath of the bubble, diversifying across countries may therefore still be effective in reducing portfolio risk.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Atlanta in its series Working Paper with number 2002-17.

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Date of creation: 2002
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Handle: RePEc:fip:fedawp:2002-17

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Keywords: Financial markets ; Risk ; Markets;

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  1. Heston, Steven L. & Rouwenhorst, K. Geert, 1994. "Does industrial structure explain the benefits of international diversification?," Journal of Financial Economics, Elsevier, vol. 36(1), pages 3-27, August.
  2. Griffin, John M. & Andrew Karolyi, G., 1998. "Another look at the role of the industrial structure of markets for international diversification strategies," Journal of Financial Economics, Elsevier, vol. 50(3), pages 351-373, December.
  3. Brooks, Robin & Del Negro, Marco, 2004. "The rise in comovement across national stock markets: market integration or IT bubble?," Journal of Empirical Finance, Elsevier, vol. 11(5), pages 659-680, December.
  4. Torsten Sløk & Michael Klein & Luca Antonio Ricci & Hali J. Edison, 2002. "Capital Account Liberalization and Economic Performance," IMF Working Papers 02/120, International Monetary Fund.
  5. Bekaert, Geert & Harvey, Campbell R. & Lumsdaine, Robin L., 2002. "Dating the integration of world equity markets," Journal of Financial Economics, Elsevier, vol. 65(2), pages 203-247, August.
  6. Heston, Steven L. & Rouwenhorst, K. Geert & Wessels, Roberto E., 1995. "The structure of international stock returns and the integration of capital markets," Journal of Empirical Finance, Elsevier, vol. 2(3), pages 173-197, September.
  7. Hali J. Edison & Michael W. Klein & Luca Ricci & Torsten Sloek, 2002. "Capital Account Liberalization and Economic Performance: Survey and Synthesis," NBER Working Papers 9100, National Bureau of Economic Research, Inc.
  8. Serra, Ana Paula, 2000. "Country and industry factors in returns: evidence from emerging markets' stocks," Emerging Markets Review, Elsevier, vol. 1(2), pages 127-151, September.
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