Global Equity Correlation in International Markets

Joon Woo Bae () and Redouane Elkamhi ()
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Joon Woo Bae: Weatherhead School of Management, Case Western Reserve University, Cleveland, Ohio 44106
Redouane Elkamhi: Rotman School of Management, University of Toronto, Toronto, Ontario, M5S 3E6, Canada

Management Science, 2021, vol. 67, issue 11, 7262-7289

Abstract: We present empirical evidence that the innovation in global equity correlation is a viable pricing factor in international markets. We develop a stylized model to motivate why this is a reasonable candidate factor and propose a simple way to measure it. We find that our factor has a robust negative price of risk and significantly improves the joint cross-sectional fits across various asset classes, including global equities, commodities, sovereign bonds, foreign exchange rates, and options. In exploring the pricing ability of our factor on the FX market, we also shed light on the link between international equity and currency markets through global equity correlations as an instrument for aggregate risks.

Keywords: asset pricing; investment; portfolio; foreign exchange rate (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:67:y:2021:i:11:p:7262-7289

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