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Are common swings in international stock returns justified by subsequent changes in national outputs?

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In an integrated world capital market, the same pricing kernel is applicable to all securities. If the kernel is excessively volatile, as has been found in some studies, it should translate into an excessive degree of correlation in the returns of different equities. In this paper, the authors apply this idea to the stock returns of different countries. First, they determine, for a given, measured degree of correlation of national stock returns. They then match the correlationsof the combined model containing the statistical model for stock returns. The authors find that actual correlations of the combined model containing the statistical model for stocks rreturns. The authors find that actual correlations are not excessive and, in fact,are about what they should be in a unified market, but that they are much larger than they should be in fully segmented financial markets.

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en

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application/pdf

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http://flora.insead.edu/fichiersti_wp/inseadwp2000/2000-02.pdf

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Copyright INSEAD. All rights reserved