IDEAS home Printed from https://ideas.repec.org/p/zbw/bubdp1/3370.html
   My bibliography  Save this paper

Firm-level evidence on international stock market comovement

Author

Listed:
  • Brooks, Robin
  • Del Negro, Marco

Abstract

We explore the link between international stock market comovement and the degree to which firms operate globally. Using stock returns and balance sheet data for companies in 20 countries, we estimate a factor model that decomposes stock returns into global, country-specific and industry-specific shocks. We find a large and highly significant link : on average, a firm raising its international sales by 10 percent raises the exposure of its stock return to global shocks by 2 percent and reduces its exposure to countryspecific shocks by 1.5 percent. This link has grown stronger since the mid-1980s.

Suggested Citation

  • Brooks, Robin & Del Negro, Marco, 2005. "Firm-level evidence on international stock market comovement," Discussion Paper Series 1: Economic Studies 2005,11, Deutsche Bundesbank.
    • Handle: RePEc:zbw:bubdp1:3370
    as

    Download full text from publisher

    File URL: https://www.econstor.eu/bitstream/10419/19519/1/200511dkp.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Kathryn M. E. Dominguez & Linda L. Tesar, 2001. "Trade and Exposure," American Economic Review, American Economic Association, vol. 91(2), pages 367-370, May.
    2. De Santis, Giorgio & Gerard, Bruno, 1997. "International Asset Pricing and Portfolio Diversification with Time-Varying Risk," Journal of Finance, American Finance Association, vol. 52(5), pages 1881-1912, December.
    3. Mr. Robin Brooks & Mr. Marco Del Negro, 2002. "The Rise in Comovement Across National Stock Markets: Market Integration or Global Bubble?," IMF Working Papers 2002/147, International Monetary Fund.
    4. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2001. "The external wealth of nations: measures of foreign assets and liabilities for industrial and developing countries," Journal of International Economics, Elsevier, vol. 55(2), pages 263-294, December.
    5. Mr. Marco Del Negro & Mr. Robin Brooks, 2002. "International Stock Returns and Market Integration: A Regional Perspective," IMF Working Papers 2002/202, International Monetary Fund.
    6. Brooks, Robin & Del Negro, Marco, 2004. "The rise in comovement across national stock markets: market integration or IT bubble?," Journal of Empirical Finance, Elsevier, vol. 11(5), pages 659-680, December.
    7. Cho, D Chinhyung & Eun, Cheol S & Senbet, Lemma W, 1986. "International Arbitrage Pricing Theory: An Empirical Investigation," Journal of Finance, American Finance Association, vol. 41(2), pages 313-329, June.
    8. Falko Fecht & Kevin X. D. Huang & Antoine Martin, 2008. "Financial Intermediaries, Markets, and Growth," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(4), pages 701-720, June.
    9. Dumas, Bernard & Solnik, Bruno, 1995. "The World Price of Foreign Exchange Risk," Journal of Finance, American Finance Association, vol. 50(2), pages 445-479, June.
    10. Kristin J. Forbes & Menzie D. Chinn, 2004. "A Decomposition of Global Linkages in Financial Markets Over Time," The Review of Economics and Statistics, MIT Press, vol. 86(3), pages 705-722, August.
    11. Menzie D. Chinn & Hiro Ito, 2002. "Capital Account Liberalization, Institutions and Financial Development: Cross Country Evidence," NBER Working Papers 8967, National Bureau of Economic Research, Inc.
    12. Bruce N. Lehmann & David M. Modest, 1985. "The Empirical Foundations of the Arbitrage Pricing Theory I: The Empirical Tests," NBER Working Papers 1725, National Bureau of Economic Research, Inc.
    13. Stockman, Alan C., 1988. "Sectoral and national aggregate disturbances to industrial output in seven European countries," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 387-409.
    14. 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.
    15. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-838, May.
    16. Robin Brooks & Marco Del Negro, 2002. "International diversification strategies," FRB Atlanta Working Paper 2002-23, Federal Reserve Bank of Atlanta.
    17. Bruce N. Lehmann & David M. Modest, 1985. "The Empirical Foundations of the Arbitrage Pricing Theory II: The Optimal Construction of Basis Portfolios," NBER Working Papers 1726, National Bureau of Economic Research, Inc.
    18. Ferson, Wayne E. & Harvey, Campbell R., 1994. "Sources of risk and expected returns in global equity markets," Journal of Banking & Finance, Elsevier, vol. 18(4), pages 775-803, September.
    19. Lane, Philip & Milesi-Ferretti, Gian Maria, "undated". "External Wealth of Nations," Instructional Stata datasets for econometrics extwealth, Boston College Department of Economics.
    20. Heston, Steven L. & Rouwenhorst, K. Geert & Wessels, Roberto E., 1995. "The structure of international stock returns and the integration of capital markets," Journal of Empirical Finance, Elsevier, vol. 2(3), pages 173-197, September.
    21. Fama, Eugene F & MacBeth, James D, 1973. "Risk, Return, and Equilibrium: Empirical Tests," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 607-636, May-June.
    22. Griffin, John M & Stulz, Rene M, 2001. "International Competition and Exchange Rate Shocks: A Cross-Country Industry Analysis of Stock Returns," The Review of Financial Studies, Society for Financial Studies, vol. 14(1), pages 215-241.
    23. Hamerle, Alfred & Liebig, Thilo & Scheule, Harald, 2004. "Forecasting Credit Portfolio Risk," Discussion Paper Series 2: Banking and Financial Studies 2004,01, Deutsche Bundesbank.
    24. Heston, Steven L. & Rouwenhorst, K. Geert, 1994. "Does industrial structure explain the benefits of international diversification?," Journal of Financial Economics, Elsevier, vol. 36(1), pages 3-27, August.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Mr. Marco Del Negro & Mr. Robin Brooks, 2005. "A Latent Factor Model with Global, Country, and Industry Shocks for International Stock Returns," IMF Working Papers 2005/052, International Monetary Fund.
    2. Kristin J. Forbes & Menzie D. Chinn, 2004. "A Decomposition of Global Linkages in Financial Markets Over Time," The Review of Economics and Statistics, MIT Press, vol. 86(3), pages 705-722, August.
    3. Baele, Lieven & Inghelbrecht, Koen, 2009. "Time-varying Integration and International diversification strategies," Journal of Empirical Finance, Elsevier, vol. 16(3), pages 368-387, June.
    4. Hooy, Chee-Wooi & Lee, Meng-Horng & Chong, Terence Tai Leung, 2017. "The Sources of Country and Industry Variations in ASEAN Stock Returns," MPRA Paper 80574, University Library of Munich, Germany.
    5. Wälti, Sébastien, 2011. "Stock market synchronization and monetary integration," Journal of International Money and Finance, Elsevier, vol. 30(1), pages 96-110, February.
    6. Juan-Pedro Gómez & Richard Priestly & Fernando Zapatero, 2003. "Keeping up with the Joneses: An international asset pricing model," Economics Working Papers 694, Department of Economics and Business, Universitat Pompeu Fabra.
    7. Cauchie, Severine & Hoesli, Martin & Isakov, Dusan, 2004. "The determinants of stock returns in a small open economy," International Review of Economics & Finance, Elsevier, vol. 13(2), pages 167-185.
    8. Phylaktis, Kate & Xia, Lichuan, 2006. "Sources of firms' industry and country effects in emerging markets," Journal of International Money and Finance, Elsevier, vol. 25(3), pages 459-475, April.
    9. Ana Paula Serra, 2003. "The Cross-Sectional Determinants of Returns: Evidence from Emerging Markets' Stocks," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 2(2), pages 123-162, May.
    10. John Ammer & Jon Wongswan, 2007. "Cash Flows and Discount Rates, Industry and Country Effects and Co‐Movement in Stock Returns," The Financial Review, Eastern Finance Association, vol. 42(2), pages 211-226, May.
    11. Francesca Carrieri & Vihang Errunza & Sergei Sarkissian, 2004. "Industry Risk and Market Integration," Management Science, INFORMS, vol. 50(2), pages 207-221, February.
    12. Geert Bekaert & Robert J. Hodrick & Xiaoyan Zhang, 2009. "International Stock Return Comovements," Journal of Finance, American Finance Association, vol. 64(6), pages 2591-2626, December.
    13. Lieven Baele & Koen Inghelbrecht, 2005. "Structural versus Temporary Drivers of Country and Industry Risk," International Finance 0511005, University Library of Munich, Germany.
    14. Ehling, Paul & Ramos, Sofia B., 2006. "Geographic versus industry diversification: Constraints matter," Journal of Empirical Finance, Elsevier, vol. 13(4-5), pages 396-416, October.
    15. Miklós Koren & Silvana Tenreyro, 2007. "Volatility and Development," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 122(1), pages 243-287.
    16. Robin Brooks & Marco Del Negro, 2002. "International diversification strategies," FRB Atlanta Working Paper 2002-23, Federal Reserve Bank of Atlanta.
    17. De Moor, Lieven & Sercu, Piet, 2011. "Country versus sector factors in equity returns: The roles of non-unit exposures," Journal of Empirical Finance, Elsevier, vol. 18(1), pages 64-77, January.
    18. Steven L. Heston & K. Geert Rouwenhorst & Roberto E. Wessels, 1999. "The Role of Beta and Size in the Cross‐Section of European Stock Returns," European Financial Management, European Financial Management Association, vol. 5(1), pages 9-27, March.
    19. Bartram, Söhnke M. & Bodnar, Gordon M., 2012. "Crossing the lines: The conditional relation between exchange rate exposure and stock returns in emerging and developed markets," Journal of International Money and Finance, Elsevier, vol. 31(4), pages 766-792.
    20. Eiling, Esther & Gerard, Bruno & Hillion, Pierre & de Roon, Frans A., 2012. "International portfolio diversification: Currency, industry and country effects revisited," Journal of International Money and Finance, Elsevier, vol. 31(5), pages 1249-1278.

    More about this item

    Keywords

    Diversification; risk; international financial markets; industrial structure;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:zbw:bubdp1:3370. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ZBW - Leibniz Information Centre for Economics (email available below). General contact details of provider: https://edirc.repec.org/data/dbbgvde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.