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Can fundamentals explain cross-country correlations of asset returns?

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URI: http://hdl.handle.net/10016/7618
ISSN: 1610-2878 (Print)
ISSN: 1610-2886 (Online)
DOI: 10.1007/s10290-006-0082-8
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crosscountry_RWE_2006_ps.pdf (207 KB)
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2006-10
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Springer
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Abstract
Previous studies show that existing correlations between national returns are higher than correlations between the national growth rates of fundamental variables. This paper examines the ability of intertemporal asset pricing models to explain cross-country correlations of national returns. We find that when capital markets are assumed to be fully integrated, a simple intertemporal general equilibrium model is able to explain the observed co-variability of domestic asset returns but generates too little variability in those returns. Results improve considerably if a less restrictive version is employed. In that setting, both domestic variability and cross-country co-variability of returns are consistent with capital market integration.
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Asset pricing models, Cross-country correlations
Bibliographic citation
Review of World Economics, octubre 2006, Vol. 142, No 3, p. 585-598
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