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Discussion Paper Details

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Title: Economic Integration and the Co-movement of Stock Returns

Author(s): Pedro Morgado and Jos� Tavares

Publication Date: October 2007

Keyword(s): Bilateral Trade Intensity, Co-movement of Stock Returns, Economic Integration and Real Exchange Rate Volatility

Programme Area(s): Financial Economics and International Macroeconomics

Abstract: In this paper we analyze the determinants of co-movements in stock returns among 40 developed and emerging markets, from the 1970s to the 1990s. We provide empirical estimates of the impact of bilateral indicators of economic integration such as bilateral trade intensity, the dissimilarity of export structures, the asymmetry of output growth and bilateral real exchange rate volatility. We find that each indicator has the expected effect on the correlation of stock returns: trade intensity increases the correlation of stock returns, while real exchange rate volatility, the asymmetry of output growth and the degree of export dissimilarity decrease it. We also find that countries with more developed and more analogous institutions - in terms of either rule of law or civil liberties - display a higher correlation of stock returns.

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Bibliographic Reference

Morgado, P and Tavares, J. 2007. 'Economic Integration and the Co-movement of Stock Returns'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=6519