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Free Flows, Limited Diversification: Explaining the Fall and Rise of Stock Market Correlations, 1890-2001

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Author Info
Dennis Quinn
Joachim Voth ()

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Abstract

Using a new dataset on capital account openness, we investigate why equity return correlations changed over the last century. Based on a new, long-run dataset on capital account regulations in a group of 16 countries over the period 1890-2001, we show that correlations increase as financial markets are liberalized. These findings are robust to controlling for both the Forbes-Rigobon bias and global averages in equity return correlations. We test the robustness of our conclusions, and show that greater synchronization of fundamentals is not the main cause of increasing correlations. These results imply that the home bias puzzle may be smaller than traditionally claimed.

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Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 1119.

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Date of creation: Nov 2006
Date of revision: Oct 2008
Handle: RePEc:upf:upfgen:1119

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Related research
Keywords: Diversification; capital flows; capital account openness; liberalization;

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Find related papers by JEL classification:
F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
N20 - Economic History - - Financial Markets and Institutions - - - General, International, or Comparative
P16 - Economic Systems - - Capitalist Systems - - - Political Economy of Capitalism

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