Co-movements of international equity markets: a large-scale factor model approach

Juliana Caicedo-llano () and Catherine Bruneau ()
Additional contact information
Juliana Caicedo-llano: Université de Paris X - Nanterre and ESG- Ecole Supérieure de Gestion
Catherine Bruneau: Université de Paris X

Economics Bulletin, 2009, vol. 29, issue 2, 1466-1482

Abstract: We analyze the comovements of a set of country-sector indexes from 45 different countries studying their factor decomposition based on a PCA analysis for a large cross section framework. We derive a measure to analyze the comovements over time based on the part of variance explained by the main extracted factors and we apply the method from Bai and Ng to study the relevant number of factors. We conduct rolling estimations for the period 1994-2006 focusing on the set of emerging markets. We show that both, emerging and developed equity markets experienced increasing comovements over the period of study, reflecting the integration of those markets. We have estimated that the main factor accounts for 30\% and 20\% of the whole variation of each data set. We use the comovements to gauge integration in two different ways, both indicating higher integration for developed markets. Finally, we relate the comovements to a measure of diversification and we conclude that it is only possible to reduce 85\% of the average risk of an equity index by diversification at the end of the period compared to 95\% at the beginning for the set of emerging markets.

Keywords: Market Integration; Equity markets; International portfolio diversification; Emerging Markets; Principal Components Analysis; Factor Analysis (search for similar items in EconPapers)
JEL-codes: C1 G1 (search for similar items in EconPapers)
Date: 2009-06-28
References: Add references at CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
http://www.accessecon.com/pubs/EB/2009/Volume29/EB-09-V29-I2-P89.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ebl:ecbull:eb-09-00165

Access Statistics for this article

More articles in Economics Bulletin from AccessEcon
Bibliographic data for series maintained by John P. Conley ().