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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.

Suggested Citation

  • G. Andrew Karolyi & Rene Stulz, "undated". "Why do Markets Move Together? An Investigation of U.S.-Japan Stock Return Comovements using ADRS," Research in Financial Economics 9501, Ohio State University.
  • Handle: RePEc:wop:ohsrfe:9501
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    File URL: http://www.cob.ohio-state.edu/~fin/journal/dice/papers/1995/95-1.pdf
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    Cited by:

    1. 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, vol. 50(3), pages 351-373, December.
    2. Ramchand, Latha & Susmel, Raul, 1998. "Volatility and cross correlation across major stock markets," Journal of Empirical Finance, Elsevier, vol. 5(4), pages 397-416, October.
    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, vol. 8(1), pages 39-57, January.

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