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Why do Markets Move Together? An Investigation of U.S.-Japan Stock Return Comovements using ADRS

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  • G. Andrew Karolyi
  • Rene Stulz

Abstract

This study explores empirically the fundamental factors that influence intraday and overnight cross-country stock return covariances. Using transactions data from the Institute for the Study of Securities Markets (ISSM) from 1988 to 1992, we construct overnight and intraday returns for a portfolio of Japanese stocks using their NYSE-traded American Depository Receipts and a matched- sample portfolio of U.S. stocks. A simple valuation framework is developed to examine cross-country correlations of returns and to discriminate between competitive and global information shocks to future expected and unexpected dividends and discount rates. We find that U.S. macroeconomic news announcements, shocks to the yen/dollar foreign exchange rate and Treasury bill returns and industry effects have no measurable influence on U.S. and Japanese return correlations. However, large shocks to broad-based market indices (Nikkei Stock Average and Standard and Poors 500 Stock Index) positively impact both the magnitude and persistence of the return correlations. The implications for international diversification strategies are discussed.

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Paper provided by Ohio State University in its series Research in Financial Economics with number 9501.

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Handle: RePEc:wop:ohsrfe:9501

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  1. K.C. Chan & Wai-Ming Fong & Rene M. Stulz, 1994. "Information, Trading and Stock Returns: Lessons from Dually-Listed Securities," NBER Working Papers 4743, National Bureau of Economic Research, Inc.
  2. Campbell, John Y & Grossman, Sanford J & Wang, Jiang, 1993. "Trading Volume and Serial Correlation in Stock Returns," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 108(4), pages 905-39, November.
  3. 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, Elsevier, vol. 50(3), pages 351-373, December.
  4. John Y. Campbell, Robert J. Shiller, 1988. "The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 1(3), pages 195-228.
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  6. Lin, Wen-Ling & Engle, Robert F & Ito, Takatoshi, 1994. "Do Bulls and Bears Move across Borders? International Transmission of Stock Returns and Volatility," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 7(3), pages 507-38.
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  9. Geert Bekaert & Robert J. Hodrick, 1991. "Characterizing Predictable Components in Excess Returns on Equity and Foreign Exchange Markets," NBER Working Papers 3790, National Bureau of Economic Research, Inc.
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  14. Rene M. Stulz, 1994. "International Portfolio Choice and Asset Pricing: An Integrative Survey," NBER Working Papers 4645, National Bureau of Economic Research, Inc.
  15. K.C. Chan & G. Andrew Karolyi & Rene M. Stulz, 1992. "Global Financial Markets and the Risk Premium on U.S. Equity," NBER Working Papers 4074, National Bureau of Economic Research, Inc.
  16. Giorgio De Santis & Bruno Gerard, 1995. "Time-varying risk and international portfolio diversification with contagious bear markets," Discussion Paper / Institute for Empirical Macroeconomics, Federal Reserve Bank of Minneapolis 99, Federal Reserve Bank of Minneapolis.
  17. Geert Bekaert & Campbell R. Harvey, 1994. "Time-Varying World Market Integration," NBER Working Papers 4843, National Bureau of Economic Research, Inc.
  18. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, Elsevier, vol. 31(3), pages 307-327, April.
  19. Solnik, Bruno, 1993. "The performance of international asset allocation strategies using conditioning information," Journal of Empirical Finance, Elsevier, Elsevier, vol. 1(1), pages 33-55, June.
  20. Bae, Kee-Hong & Andrew Karolyi, G., 1995. "Good news, band news and international spilovers of stock return volatility between Japan and the U.S," Pacific-Basin Finance Journal, Elsevier, Elsevier, vol. 3(1), pages 144-144, May.
  21. Roll, Richard, 1992. " Industrial Structure and the Comparative Behavior of International Stock Market Indices," Journal of Finance, American Finance Association, American Finance Association, vol. 47(1), pages 3-41, March.
  22. Heston, Steven L. & Rouwenhorst, K. Geert, 1994. "Does industrial structure explain the benefits of international diversification?," Journal of Financial Economics, Elsevier, Elsevier, vol. 36(1), pages 3-27, August.
  23. Hamao, Yasushi & Masulis, Ronald W & Ng, Victor, 1990. "Correlations in Price Changes and Volatility across International Stock Markets," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 3(2), pages 281-307.
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Cited by:
  1. Ramchand, Latha & Susmel, Raul, 1998. "Volatility and cross correlation across major stock markets," Journal of Empirical Finance, Elsevier, Elsevier, vol. 5(4), pages 397-416, October.
  2. John M. Griffin & G. Andrew Karolyi, . "Another Look at the Role of the Industrial Structure of Markets for International Diversification Strategies," Research in Financial Economics, Ohio State University 9608, Ohio State University.
  3. Ramchand, Latha & Susmel, Raul, 1998. "Variances and covariances of international stock returns: the international capital asset pricing model revisited," Journal of International Financial Markets, Institutions and Money, Elsevier, Elsevier, vol. 8(1), pages 39-57, January.

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