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International Stock Comovements with Endogenous Clusters

Author

Listed:
  • Coroneo, Laura

    () (Department of Economics and Related Studies, University of York)

  • Jackson, Laura E.

    (Bentley University)

  • Owyang, Michael T.

    () (Federal Reserve Bank of St. Louis)

Abstract

We use an endogenous cluster factor model to examine international stock return comovements of country-industry portfolios. Our model allows country-industry portfolio comovements to be driven by a global and a cluster component, with the cluster membership endogenously determined. Results indicate that country-industry portfolios tend to cluster mainly within geographical areas that can include one or more countries. The cluster component was the main driver of country-industry portfolio returns for most of the sample, except from mid-2000 to mid-2010s when the global component had a more prominent role. At the end of the sample, a large cluster among European countries emerges.

Suggested Citation

  • Coroneo, Laura & Jackson, Laura E. & Owyang, Michael T., 2018. "International Stock Comovements with Endogenous Clusters," Working Papers 2018-38, Federal Reserve Bank of St. Louis.
  • Handle: RePEc:fip:fedlwp:2018-038
    DOI: doi.org/10.20955/wp.2018.038
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    More about this item

    Keywords

    diversification; risk; international financial markets; clustered factor model;

    JEL classification:

    • C38 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Classification Methdos; Cluster Analysis; Principal Components; Factor Analysis
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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