International Financial Connection and Stock Return Comovement

34 Pages Posted: 23 Sep 2019

Date Written: August 2019

Abstract

This paper studies whether bilateral international financial connection data help predict bilateral stock return comovement. It is shown that, when the United States is chosen as the benchmark, a larger U.S. portfolio investment asset position on the destination economy predicts a stronger stock return comovement between them. For large economies such as the United States and Germany, the portfolio investment position is also the best predictor among other connection variables. The paper discusses with a simple general equilibrium portfolio model that the empirical pattern is consistent with the behavior of index investors who trade in response to risk-on/risk-off shocks.

Keywords: Financial statistics, Economic integration, Investment analysis, Balance of payments, Business cycles, stock return comovement, international investment position, risk-on, risk-off, WP, empirical result, portfolio investment, investment position, empirical find, portfolio

JEL Classification: F21, F39, G15, E01, F1, C, F16, G21

Suggested Citation

Ando, Sakai, International Financial Connection and Stock Return Comovement (August 2019). IMF Working Paper No. 19/181, Available at SSRN: https://ssrn.com/abstract=3457769

Sakai Ando (Contact Author)

Columbia University ( email )

New York

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