Cross country stock market comovement: A macro perspective

Determinants of Stock Market Correlation. Accounting for Model Uncertainty and Reverse Causality in a Large Panel Setting

“…However, this relatively small effect should not be overstated, as there are three other variables that can capture the role of financial flows on the comovement of market returns. This result can be contrasted with the fragility of direct investment flows (DEflows) characterized by the value of posterior mean below 0.001 13 , and differs from prior research that reports significant role for FDI flows in stock market correlations (Anagnostopoulos et al, 2022;Johnson and Soenen, 2002). The difference between our results and previous related studies could be linked to the fact that such research did not account for model uncertainty, and did not include portfolio flows in their specification.…”

“…The results on the impact of trade linkages in stock market comovement in the existing literature is mixed. Most of the authors report it as being significant (Forbes and Chinn, 2004;Gavazzoni and Santacreu, 2020;Guo and Tu, 2021;Liu, 2013;Wälti, 2011), while in other studies it depends on the specification (Anagnostopoulos et al, 2022;Beine and Candelon, 2011) or has no impact on stock market synchronization (Viceira and Wang, 2018).…”

“…None of the related existing studies, thus far, considered the role of portfolio capital flows on stock market market comovement. However, the role of FDI was considered by Johnson and Soenen (2002) and Anagnostopoulos et al (2022).…”

“…The advantage of using a product measure lies in the fact that the measure is bound between 0 and 1, and can take the value of 0, even if one of the countries is characterized by perfect capital mobility, while the other imposes prohibitive capital controls. Capital mobility was considered in various analyses as an incentive of stock market correlations (Anagnostopoulos et al, 2022;Bracker and Koch, 1999;Quinn and Voth, 2008;Viceira and Wang, 2018;Wälti, 2011).…”

“…There is a handful of papers where the authors examine a couple of potential determinants at a time (Baele et al, 2010;Beine and Candelon, 2011;Bracker and Koch, 1999;Hwang et al, 2013;Johnson and Soenen, 2002;Liu, 2013;Wälti, 2011). Most of the research concentrates on one or two specific linkages (Aladesanmi et al, 2019;Flavin et al, 2002;Forbes and Chinn, 2004;Guo and Tu, 2021;Lee and Kim, 2020;Quinn and Voth, 2008;Roll, 1992;Viceira and Wang, 2018) or reports an empirical finding in the support of a theoretical model (Anagnostopoulos et al, 2022;Gavazzoni and Santacreu, 2020). However, almost none of the work, thus far, accounts for model uncertainty in a systematic way.…”