Economic News and International Stock Market Co-Movement
Board of Governors of the Federal Reserve System
Rui A. Albuquerque
Boston University - School of Management; Católica-Lisbon School of Business and Economics; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)
February 13, 2007
EFA 2006 Zurich Meetings
We analyze the effects that real-time domestic and foreign news about fundamentals have on the co-movement between stock returns of a small, open economy, Portugal, and a large economy, the United States. Studying co-movement between the US and a small, open economy helps overcome significant potential issues in the literature: (i) we avoid endogeneity biases; (ii) we increase the statistical power to reject the null hypothesis in favor of the alternative that US macroeconomic news are drivers of co-movement; and (iii) our results are less likely to suffer from omitted variable biases. Consistent with our theoretical model, we find that US macroeconomic news and Portuguese earnings news do not affect cross-country stock market co-movement, whereas Portuguese macroeconomic news lowers cross-country stock market co-movement. We also find that US public information affects Portuguese stock market returns; however, this effect is much reduced when US stock market returns are included in the regression. We provide evidence, contrary to common wisdom, that this result does not derive from contagion. Finally, public information is associated with increased liquidity in the United States, while the effect in Portugal depends on the type of news released.
Number of Pages in PDF File: 64
Keywords: Private information, public news announcements, information spillovers, international equity returns, contagion
JEL Classification: F3, G12, G14, G15working papers series
Date posted: March 3, 2006
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