Why Do Markets Move Together? An Investigation of U.S.-Japan Stock Return Comovements Using Adrs

THE CHARLES A. DICE CENTER FOR RESEARCH IN FINANCIAL ECONOMICS

41 Pages Posted: 28 Feb 1996

See all articles by George Andrew Karolyi

George Andrew Karolyi

Cornell University - Samuel Curtis Johnson Graduate School of Management

René M. Stulz

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Abstract

This study explores empirically the fundamental factors that influence intraday and overnight cross country stock return covariances. Using the Institute for Study of Securities Markets (ISSM) transactions data from 1988 to 1992, we construct overnight and intraday returns for a portfolio of Japanese stocks using their NYSE-traded American Depository Receipts and a matched-sample portfolio of U.S. stocks. A simple valuation framework is developed to examine cross-country correlations of returns and to discriminate between "competitive" and "global" information shocks to future expected and unexpected dividends and discount rates. We find that U.S. macroeconomic news announcements, shocks to the yen/dollar foreign exchange rate and Treasury bill returns and industry effects have no measurable influence on U.S. and Japanese return correlations. However, large shocks to broad-based market indexes (Nikkei Stock Average and Standard and Poor's 500 Stock Index) positively impact both the magnitude and persistence of the return correlations. The implications for international diversification strategies are discussed.

JEL Classification: G12, G15

Suggested Citation

Karolyi, George Andrew and Stulz, Rene M., Why Do Markets Move Together? An Investigation of U.S.-Japan Stock Return Comovements Using Adrs . THE CHARLES A. DICE CENTER FOR RESEARCH IN FINANCIAL ECONOMICS. Available at SSRN: https://ssrn.com/abstract=40556 or http://dx.doi.org/10.2139/ssrn.40556

George Andrew Karolyi (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States

Rene M. Stulz

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

HOME PAGE: http://www.cob.ohio-state.edu/fin/faculty/stulz

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

European Corporate Governance Institute (ECGI)

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

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