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

40 Pages Posted: 12 Nov 2007

See all articles by Hans-Joachim Voth

Hans-Joachim Voth

University of Zurich - UBS International Center of Economics in Society; Centre for Economic Policy Research (CEPR)

Dennis P. Quinn

Georgetown University - Department of Strategy/Economics/Ethics/Public Policy

Multiple version iconThere are 2 versions of this paper

Date Written: September 2007

Abstract

Using a new dataset on capital account openness, we investigate why equity return correlations changed over the last century. Using equity returns from 16 countries for the period 1890-2001, we show that correlations increase as financial markets are liberalized. In addition, countries with similar regulatory regimes show higher correlations. These findings are robust to controlling for both the Forbes-Rigobon bias and global averages in equity return correlations. We 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.

Keywords: diversification, capital controls, capital flows, home bias

JEL Classification: G15, G18, N20, P16

Suggested Citation

Voth, Hans-Joachim and Quinn, Dennis P., Free Flows, Limited Diversification: Explaining the Fall and Rise of Stock Market Correlations, 1890-2001 (September 2007). Available at SSRN: https://ssrn.com/abstract=1028985 or http://dx.doi.org/10.2139/ssrn.1028985

Hans-Joachim Voth (Contact Author)

University of Zurich - UBS International Center of Economics in Society ( email )

Raemistrasse 71
Zuerich, 8006
Switzerland

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Dennis P. Quinn

Georgetown University - Department of Strategy/Economics/Ethics/Public Policy ( email )

Washington, DC 20057
United States

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