The Structure of International Stock Returns and the Integration of Capital Markets

Posted: 14 Dec 2004

See all articles by Steven L. Heston

Steven L. Heston

University of Maryland - Department of Finance

Roberto E. Wessels

University of Groningen - Faculty of Economics and Business

K. Geert Rouwenhorst

Yale School of Management - International Center for Finance

Abstract

This paper investigates the structure of international stock returns in Europe and the U.S., and examines whether international capital markets are integrated. Using data on 6000 firms in the U.S. and twelve European countries from 1978 to 1990, we find evidence that countries share multiple risk factors. We test whether capital markets are integrated by examining the pricing of country indices and comparing the pricing of risk accross countries. Our tests support the hypothesis that capital markets in our sample are internationally integrated in the sense that the rewards for risks are identical accross countries. However, we find a widespread size effect that is uncorrelated accross countries. This finding provides international evidence against the joint hypothesis of our pricing model and the hypothesis that capital markets for large firms are integrated with the markets for small firms.

Keywords: capital market integration, international equity markets, factor models

JEL Classification: G15,G12

Suggested Citation

Heston, Steven L. and Wessels, Roberto E. and Rouwenhorst, K. Geert, The Structure of International Stock Returns and the Integration of Capital Markets. Available at SSRN: https://ssrn.com/abstract=592044

Steven L. Heston

University of Maryland - Department of Finance ( email )

Robert H. Smith School of Business
Van Munching Hall
College Park, MD 20742
United States

Roberto E. Wessels

University of Groningen - Faculty of Economics and Business ( email )

+31-50-3633633685 (Phone)

HOME PAGE: http://www.rug.nl

K. Geert Rouwenhorst (Contact Author)

Yale School of Management - International Center for Finance ( email )

165 Whitney Avenue
P.O. Box 208200
New Haven, CT 06520-8200
United States
203-432-6046 (Phone)
203-432-8931 (Fax)

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