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Discussion Paper Details

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Title: Free Flows, Limited Diversification: Explaining the Fall and Rise of Stock Market Correlations, 1890-2001

Author(s): Dennis Quinn and Hans-Joachim Voth

Publication Date: October 2008

Keyword(s): diversification, equity return correlations and home bias

Programme Area(s): International Macroeconomics

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.

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Bibliographic Reference

Quinn, D and Voth, H. 2008. 'Free Flows, Limited Diversification: Explaining the Fall and Rise of Stock Market Correlations, 1890-2001'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=7013