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

51 Pages Posted: 18 Dec 2008

See all articles by Dennis P. Quinn

Dennis P. Quinn

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

Hans-Joachim Voth

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

Multiple version iconThere are 2 versions of this paper

Date Written: October 2008

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.

Keywords: diversification, equity return correlations, home bias

JEL Classification: F21, G15, G18, N20, P16

Suggested Citation

Quinn, Dennis P. and Voth, Hans-Joachim, Free Flows, Limited Diversification: Explaining the Fall and Rise of Stock Market Correlations, 1890-2001 (October 2008). CEPR Discussion Paper No. DP7013. Available at SSRN: https://ssrn.com/abstract=1311137

Dennis P. Quinn

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

Washington, DC 20057
United States

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

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