Thursday, June 08, 2006

A SUPER quick look at international covariances

Shorter than short version: International return correlations may NOT be increasing as much as we thought!

This has to be short as I have meetings all afternoon. In fact it was in preparing for the meeting (essentially pension planning for a local religious community), that I stumbled upon the following. I do not have time to give it a complete "review" but it flies in the face of conventional wisdom (I think it would make John Stossel happy!)

The paper is by Bekaert, Hodrick, and Zhang. From their abstract:

"We examine international stock return comovements using country-industry and country-style portfolios as the base portfolios....First, we do not find evidence for an upward trend in return correlations, except for the European stock markets. Second, the increasing importance of industry factors relative to country factors was a short-lived, temporary phenomenon. Third, we find no evidence for a trend in idiosyncratic risk in any of the countries we examine."

Yeah, a definite "I'll read the rest later!" But for now, that is all i have time for.

Cite: Bekaert, Geert, Hodrick, Robert J. and Zhang, Xiaoyan, "International Stock Return Comovements" (November 28, 2005). AFA 2007 Chicago Meetings Paper Available at SSRN:

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