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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.

Suggested Citation

  • Quinn, Dennis & Voth, Hans-Joachim, 2008. "Free Flows, Limited Diversification: Explaining the Fall and Rise of Stock Market Correlations, 1890-2001," CEPR Discussion Papers 7013, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:7013
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    References listed on IDEAS

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    Cited by:

    1. Stijn Claessens & M. Ayhan Kose & Marco E. Terrones, 2011. "Financial Cycles: What? How? When?," NBER International Seminar on Macroeconomics, University of Chicago Press, vol. 7(1), pages 303-344.

    More about this item

    Keywords

    diversification; equity return correlations; home bias;

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • N20 - Economic History - - Financial Markets and Institutions - - - General, International, or Comparative
    • P16 - Economic Systems - - Capitalist Systems - - - Political Economy of Capitalism

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