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International Stock Comovements with Endogenous Clusters

Laura Coroneo (), Laura E. Jackson and Michael Owyang ()
Authors registered in the RePEc Author Service: Laura Jackson Young () and Laura Jackson

No 2018-038, Working Papers from Federal Reserve Bank of St. Louis

Abstract: We examine international stock return comovements of country-industry portfolios. Our model allows comovements to be driven by a global and a cluster component, with the cluster membership endogenously determined. Results indicate that country-industry portfolios tend to cluster mainly within geographical areas that can include one or more countries. The cluster compositions substantially changed over time, with the emergence of clusters among European countries from the early 2000s. The cluster component was the main driver of country-industry portfolio returns for most of the sample, except from the mid-2000s to the mid-2010s when the global component had a more prominent role.

Keywords: risk; clustered factor model; international financial markets; diversification (search for similar items in EconPapers)
JEL-codes: G15 C38 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2018-10-24, Revised 2020-03-27
New Economics Papers: this item is included in nep-fmk
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DOI: 10.20955/wp.2018.038

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Handle: RePEc:fip:fedlwp:2018-038