International Financial Connection and Stock Return Comovement

Sakai Ando

No 2019/181, IMF Working Papers from International Monetary Fund

Abstract: This paper studies whether bilateral international financial connection data help predict bilateral stock return comovement. It is shown that, when the United States is chosen as the benchmark, a larger U.S. portfolio investment asset position on the destination economy predicts a stronger stock return comovement between them. For large economies such as the United States and Germany, the portfolio investment position is also the best predictor among other connection variables. The paper discusses with a simple general equilibrium portfolio model that the empirical pattern is consistent with the behavior of index investors who trade in response to risk-on/risk-off shocks.

Keywords: WP; risk tolerance; stock return comovement; international investment position; risk-on; risk-off; comovement variable; portfolio investment position; stock return correlation; asset data; stock return behavior; portfolio investment data; comovement data; asset economy; equity return; Stocks; Portfolio investment; Stock markets; Foreign direct investment; Bond yields; Global (search for similar items in EconPapers)
Pages: 33
Date: 2019-08-22
New Economics Papers: this item is included in nep-rmg
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