The Cross-Section of Country News, Decoupling Expectations, and Global Business Cycles

HKIMR Working Paper No. 34/2011

34 Pages Posted: 29 Nov 2011

See all articles by Mathias Hoffmann

Mathias Hoffmann

University of Zurich - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Wei Liao

International Monetary Fund

Date Written: November 28, 2011

Abstract

We define decoupling as an increase in the cross-country heterogeneity in long-term growth expectations. We identify growth expectations from a cointegrating relation between a country's output level and its stock market valuation. Fluctuations in this output-price or yp-ratio reflect changes in perceptions about future real activity (output growth) or changes in the expectation of long-term stock market returns or both. Shocks to the cross-country dispersion of yp-ratios therefore provide information on the heterogeneity of the international cross-section of country-specific news about future real (output growth) and financial (return) opportunities. We show that shocks to the international cross-section of news have particularly high trend growth effects in Emerging Asia including China, particularly in the period since the Asian financial crisis. A factor analysis of the cross-section of stock market and output growth expectations reveals an increasing role for regional factors in both financial markets and for output growth. Whereas the role of regional factors in output growth has increased at the expense of global factors - a possible instance of decoupling - financial factors have become more regional at the expense of purely country-specific influences.

Keywords: international business cycles, country-level growth expectations, return predictability, news shocks, decoupling, emerging markets, global imbalances

JEL Classification: E32, F30, F40

Suggested Citation

Hoffmann, Mathias and Liao, Wei, The Cross-Section of Country News, Decoupling Expectations, and Global Business Cycles (November 28, 2011). HKIMR Working Paper No. 34/2011, Available at SSRN: https://ssrn.com/abstract=1965384 or http://dx.doi.org/10.2139/ssrn.1965384

Mathias Hoffmann (Contact Author)

University of Zurich - Department of Economics ( email )

Zuerich, 8006
Switzerland

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Wei Liao

International Monetary Fund ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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