Determinants of stock market correlations. Accounting for model uncertainty and reverse causality in a large panel setting

Antonio Afonso, Krzysztof Beck and Karen Jackson

No 2022/0246, Working Papers REM from ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa

Abstract: We examine 22 determinants of stock market correlations in a panel setting with 651 country pairs of developed economies over the 2001-2018 period, while accounting for model uncertainty and reverse causality. On the one hand, we find, that a number of determinants, well established in the literature, e.g. trade, institutional distance, and exchange rate volatility fail the robustness test. On the other hand, we find strong evidence supporting several others: (1) inertia, with current correlation being the best single predictor of the future stock market correlation (2) positive impact of the market size (3) imperative role of the interconnected financial factors: capital mobility, financial development, and portfolio equity flows. With the expected future growth of economies and their capital markets as well as deepening financial liberalization, this paper brings strong support to the hypothesis of diminishing international diversification potential.

Keywords: stock market correlations; stock market comovement; financial development; Bayesian model averaging; OECD countries (search for similar items in EconPapers)
JEL-codes: F62 G10 G11 G15 (search for similar items in EconPapers)
Date: 2022-09
New Economics Papers: this item is included in nep-fdg
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://rem.rc.iseg.ulisboa.pt/wps/pdf/REM_WP_0246_2022.pdf (application/pdf)

Related works:
Working Paper: Determinants of Stock Market Correlation. Accounting for Model Uncertainty and Reverse Causality in a Large Panel Setting (2022)
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:ise:remwps:wp02462022

Access Statistics for this paper

More papers in Working Papers REM from ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa ISEG - Lisbon School of Economics and Management, REM, R. Miguel Lupi, 20, LISBON, PORTUGAL.
Bibliographic data for series maintained by Sandra Araújo ().