Are Correlations of Stock Returns Justified by Subsequent Changes in National Outputs?

44 Pages Posted: 28 Apr 2005

See all articles by Bernard Dumas

Bernard Dumas

INSEAD; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Campbell R. Harvey

Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER)

Pierre Ruiz

affiliation not provided to SSRN

Date Written: August 7, 2002

Abstract

In an integrated world capital market, the same pricing kernel is applicable to all securities. We apply this idea to the stock returns of different countries. We investigate the underlying determinants of cross-country stock return correlations. First, we determine, for a given, measured degree of commonality of country outputs, what should be the degree of correlation of national stock returns. We propose a framework that contains a statistical model for output and an intertemporal financial market model for stock returns. We then attempt to match the correlations generated by the model with measured correlations. Our results show that under the hypothesis of market segmentation, the model correlations are much smaller than observed correlations. However, assuming world markets are integrated, our model correlations closely match observed correlations.

Keywords: Industry correlations, market integration, market segmentation, stock correlation, output correlation

JEL Classification: G15, F36

Suggested Citation

Dumas, Bernard and Harvey, Campbell R. and Ruiz, Pierre, Are Correlations of Stock Returns Justified by Subsequent Changes in National Outputs? (August 7, 2002). Available at SSRN: https://ssrn.com/abstract=708401 or http://dx.doi.org/10.2139/ssrn.708401

Bernard Dumas

INSEAD ( email )

Boulevard de Constance
F-77305 Fontainebleau Cedex
France
+33 1 60 72 49 92 (Phone)
+33 1 60 72 40 45 (Fax)

HOME PAGE: http://www.insead.fr/~dumas/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Campbell R. Harvey (Contact Author)

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-7768 (Phone)

HOME PAGE: http://www.duke.edu/~charvey

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Pierre Ruiz

affiliation not provided to SSRN

Register to save articles to
your library

Register

Paper statistics

Downloads
161
Abstract Views
2,011
rank
184,299
PlumX Metrics