Discussion Paper Details

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Title: Trade Credit and International Return Comovement

Author(s): Rui Albuquerque, Tarun Ramadorai and Sumudu Watugala

Publication Date: February 2011

Keyword(s): asymmetric information, international stock return comovement, rebalancing trades and trade credit

Programme Area(s): Financial Economics

Abstract: We examine trade credit links between firms as a channel of international return comovement. We model firms in different countries connected by trade credit links in segmented stock markets with asymmetrically informed investors. The model predicts that the cross-serial correlation of country stock returns increases as trade credit increases. Using data from 42 countries from 1993 to 2009, we find evidence consistent with the model. Stock returns of high trade credit firms in exporting countries are predicted by the returns of the countries that consume this output. A model-implied cross-country long-short portfolio strategy yields 12-15 percent annualized, after risk adjustment.

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Bibliographic Reference

Albuquerque, R, Ramadorai, T and Watugala, S. 2011. 'Trade Credit and International Return Comovement'. London, Centre for Economic Policy Research.