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| Author: | Dumas, B. Harvey, C.R. Ruiz, P. |
| Title: | Are correlations of stock returns justified by subsequent changes in national outputs? |
| Journal: | Journal of International Money and Finance
2003 : DEC, VOL. 22:6, p. 777-811 |
| Index terms: | Business cycles Integration Market segmentation Stock returns |
| Freeterms: | Correlation |
| Language: | eng |
| Abstract: | In an integrated world capital market, the same pricing kernel is applicable to all securities. This idea is applied to the stock returns of different countries. First the authors determine for a given, measured degree of commonality of country outputs, what should be the degree of correlation of national stock returns. A framework that contains a statistical model for output and an intertemporal financial market model for stock returns is proposed. Then the correlations generated by the model are attempted to match with measured correlations. The results indicate that under the hypothesis of market segmentation, the model correlations are significantly smaller than observed correlations. |
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