This paper tests if real and financial linkages between countries can explain why movements in the world's largest markets often have such large effects on other financial markets, and how these cross-market linkages have changed over time. It estimates a factor model in which a country's market returns are determined by: global, sectoral, and cross-country factors (returns in large financial markets), and country-specific effects. Then it uses a new data set on bilateral linkages between the world's 5 largest economies and about 40 other markets to decompose the cross-country factor loadings into: direct trade flows, competition in third markets, bank lending, and foreign direct investment. Estimates suggest that both cross-country and sectoral factors are important determinants of stock and bond returns, and that the U.S. factor has recently gained importance, while the Japanese and U.K. factors have lost importance. From 1996-2000, real and financial linkages became more important determinants of how shocks are transmitted from large economies to other markets. In particular, bilateral trade flows are large and significant determinants of cross-country linkages in both stock and bond markets. Bilateral foreign investment is usually insignificant. Therefore, despite the recent growth in global financial flows, direct trade still appears to be the most important determinant of how movements in the world's largest markets affect financial markets around the globe.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
9555.
Length: Date of creation: Mar 2003 Date of revision: Handle: RePEc:nbr:nberwo:9555
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References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Eichengreen, Barry & Rose, Andrew K & Wyplosz, Charles, 1996.
"Contagious Currency Crises,"
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[Downloadable!] (restricted)
Other versions:
Barry Eichengreen & Andrew K. Rose & Charles Wyplosz, 1996.
"Contagious Currency Crises,"
NBER Working Papers
5681, National Bureau of Economic Research, Inc.
[Downloadable!] (restricted)
Kathryn M.E. Dominguez & Linda L. Tesar, 2001.
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[Downloadable!] (restricted)
Other versions:
Kathryn M. E. Dominguez & Linda L. Tesar, 2001.
"Trade and Exposure,"
American Economic Review,
American Economic Association, vol. 91(2), pages 367-370, May.
[Downloadable!] (restricted)
Other versions:
Kathryn M.E. Dominguez & Linda L. Tesar, 2001.
"Trade and Exposure,"
NBER Working Papers
8129, National Bureau of Economic Research, Inc.
[Downloadable!] (restricted)
Kathryn M.E Dominguez & Linda L. Tesar, 2000.
"Trade and Exposure,"
Working Papers
466, Research Seminar in International Economics, University of Michigan.
[Downloadable!]
Cited by: (explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.) This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page.