Gravity in International Equity Markets

58 Pages Posted: 18 Jan 2019

See all articles by Joon Woo Bae

Joon Woo Bae

Case Western Reserve University - Weatherhead School of Management

Date Written: November 15, 2017

Abstract

The size of economies and geographical distance are signi cant determinants of the contemporaneous and cross-serial correlations in international equity market returns across countries. Larger countries lead returns of small-countries, and this cross-country predictability decreases with geographical distance of the two countries. A long-short trading strategy that exploits this relation yields risk-adjusted returns of 10% per annum. The lead-lag relation is not driven by cross-country differences in the average size or liquidity of rms, the degree of stock market development, or the industry composition. Decomposing stock market returns into cash-flow and discount rate news shows that the international transmission of discount-rate news is more pronounced than cash-flow news and that the size of economies and geographical distance are signi cant determinants for both components of returns.

Suggested Citation

Bae, Joon Woo, Gravity in International Equity Markets (November 15, 2017). Available at SSRN: https://ssrn.com/abstract=3312433 or http://dx.doi.org/10.2139/ssrn.3312433

Joon Woo Bae (Contact Author)

Case Western Reserve University - Weatherhead School of Management ( email )

10900 Euclid Ave.
Cleveland, OH 44106-7235
United States

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