Trade Credit and International Return Comovement

47 Pages Posted: 9 Feb 2011

See all articles by Rui A. Albuquerque

Rui A. Albuquerque

Boston College, Carroll School of Management; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Tarun Ramadorai

Imperial College London; Centre for Economic Policy Research (CEPR)

Sumudu W. Watugala

Cornell University - Dyson School of Applied Economics and Management; University of Oxford - Oxford-Man Institute of Quantitative Finance

Multiple version iconThere are 2 versions of this paper

Date Written: February 2011

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.

Keywords: asymmetric information, international stock return comovement, rebalancing trades, trade credit

JEL Classification: F30, F36, F37, G12, G15

Suggested Citation

Albuquerque, Rui A. and Ramadorai, Tarun and Watugala, Sumudu W., Trade Credit and International Return Comovement (February 2011). CEPR Discussion Paper No. DP8222. Available at SSRN: https://ssrn.com/abstract=1758431

Rui A. Albuquerque (Contact Author)

Boston College, Carroll School of Management ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467-3808
United States

HOME PAGE: http://ruialbuquerque.webs.com

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Tarun Ramadorai

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

HOME PAGE: http://www.tarunramadorai.com

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Sumudu W. Watugala

Cornell University - Dyson School of Applied Economics and Management ( email )

Ithaca, NY
United States

University of Oxford - Oxford-Man Institute of Quantitative Finance ( email )

Eagle House
Walton Well Road
Oxford, Oxfordshire OX2 6ED
United Kingdom

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