A Century of Global Equity Market Correlations

American Economic Review: Papers & Proceedings 2008, 98:2, 535–540

Georgetown McDonough School of Business Research Paper No. 4494873

6 Pages Posted: 11 Jul 2023

See all articles by Dennis P. Quinn

Dennis P. Quinn

Georgetown University - Department of Strategy/Economics/Ethics/Public Policy

Hans-Joachim Voth

University of Zurich - UBS International Center of Economics in Society; Centre for Economic Policy Research (CEPR)

Date Written: June 29, 2023

Abstract

In this paper, we use a unique long-run dataset of regulatory constraints on capital account openness to explain stock market correlations. Since stock returns themselves are highly volatile, any examination of what drives correlations needs to focus on long runs of data. This is particularly true since some of the short-term changes in co-movements appear to reverse themselves (Delroy Hunter 2005). We argue that changes in the co-movement of indices have not been random. Rather, they are mainly driven by greater freedom to move funds from one country to another. In related work, Geert Bekaert and Campbell Harvey (2000) show that equity correlations increase after liberalization of capital markets, using a number of case studies from emerging countries. We examine this pattern systematically for the last century, and find it to be most pronounced in the recent past. We compare the importance of capital account openness with one main alternative explanation, the growing synchronization of economic fundamentals. We conclude that greater openness has been the single most important cause of growing correlations during the last quarter of a century, though increasingly correlated economic fundamentals also matter. In the conclusion, we offer some thoughts on why the effects of greater openness appear to be so much stronger today than they were during the last era of globalization before 1914.

JEL Classification: N20, F32, G15

Suggested Citation

Quinn, Dennis P. and Voth, Hans-Joachim, A Century of Global Equity Market Correlations (June 29, 2023). American Economic Review: Papers & Proceedings 2008, 98:2, 535–540, Georgetown McDonough School of Business Research Paper No. 4494873, Available at SSRN: https://ssrn.com/abstract=4494873

Dennis P. Quinn (Contact Author)

Georgetown University - Department of Strategy/Economics/Ethics/Public Policy ( email )

Washington, DC 20057
United States

Hans-Joachim Voth

University of Zurich - UBS International Center of Economics in Society ( email )

Raemistrasse 71
Zuerich, 8006
Switzerland

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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