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Co-movements of international equity markets: a large-scale factor model approach

Author

Listed:
  • Juliana Caicedo-llano

    (Université de Paris X - Nanterre and ESG- Ecole Supérieure de Gestion)

  • Catherine Bruneau

    (Université de Paris X)

Abstract

We analyze the comovements of a set of country-sector indexes from 45 different countries studying their factor decomposition based on a PCA analysis for a large cross section framework. We derive a measure to analyze the comovements over time based on the part of variance explained by the main extracted factors and we apply the method from Bai and Ng to study the relevant number of factors. We conduct rolling estimations for the period 1994-2006 focusing on the set of emerging markets. We show that both, emerging and developed equity markets experienced increasing comovements over the period of study, reflecting the integration of those markets. We have estimated that the main factor accounts for 30\% and 20\% of the whole variation of each data set. We use the comovements to gauge integration in two different ways, both indicating higher integration for developed markets. Finally, we relate the comovements to a measure of diversification and we conclude that it is only possible to reduce 85\% of the average risk of an equity index by diversification at the end of the period compared to 95\% at the beginning for the set of emerging markets.

Suggested Citation

  • Juliana Caicedo-llano & Catherine Bruneau, 2009. "Co-movements of international equity markets: a large-scale factor model approach," Economics Bulletin, AccessEcon, vol. 29(2), pages 1466-1482.
    • Handle: RePEc:ebl:ecbull:eb-09-00165
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    Citations

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    Cited by:

    1. Carlos Castro & Nini Johana Marin, 2014. "Stock return comovements and integration within the Latin American integrated market," Documentos de Trabajo 11082, Universidad del Rosario.
    2. George Tzagkarakis & Juliana Caicedo-Llano & Thomas Dionysopoulos, 2016. "Time-Frequency Adapted Market Integration Measure Based on Hough Transformed Multiscale Decompositions," Computational Economics, Springer;Society for Computational Economics, vol. 48(1), pages 1-27, June.
    3. Bhuiyan, Rubaiyat Ahsan & Rahman, Maya Puspa & Saiti, Buerhan & Ghani, Gairuzazmi Bin Mat, 2019. "Does the Malaysian Sovereign sukuk market offer portfolio diversification opportunities for global fixed-income investors? Evidence from wavelet coherence and multivariate-GARCH analyses," The North American Journal of Economics and Finance, Elsevier, vol. 47(C), pages 675-687.

    More about this item

    Keywords

    Market Integration; Equity markets; International portfolio diversification; Emerging Markets; Principal Components Analysis; Factor Analysis;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General

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