Financial Integration and the Price of World Covariance Risk: Large vs. Small-Cap Stocks

41 Pages Posted: 26 Apr 2006

See all articles by Wei Huang

Wei Huang

University of Hawaii at Manoa - Shidler College of Business

Abstract

We investigate whether recent country-level evidence of global pricing is particular to large-cap stocks. Specifically, we examine cross-country return correlations and conduct asset pricing tests on three size-based stock portfolios for nine developed countries over the 1980 to 2004 period. We find that large-cap stocks realize significant comovements across countries, whereas small-cap stocks realize smaller average correlations (relative to both large-cap stocks and small-cap stocks across countries). More important, asset pricing tests suggest that while large-cap stocks are priced globally, global pricing is rejected for most small-cap stocks. Finally, the evidence indicates that financial integration deepened in recent years primarily for large-cap stocks. Overall, the results suggest that the global pricing pertains chiefly to large-cap stocks.

Keywords: financial integration, international asset pricing, world covariance risk, MSCI indices

JEL Classification: G12, G15

Suggested Citation

Huang, Wei, Financial Integration and the Price of World Covariance Risk: Large vs. Small-Cap Stocks . Journal of International Money and Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=898067

Wei Huang (Contact Author)

University of Hawaii at Manoa - Shidler College of Business ( email )

2404 Maile Way
Honolulu, HI 96822
United States
808-956-7679 (Phone)
808-956-9887 (Fax)

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