Tateno, Yusuke. 2011. Essays On International Comovements Of Financial Markets. Doctoral
Dissertation, Cornell University.
International portfolio
diversification is beneficial only if asset returns are not significantly
correlated across countries. Therefore, it is essential for investors who want
to make an appropriate portfolio selection to understand the nature of asset
return correlations. This thesis consists of three essays on international
comovements of financial markets. The first essay analyzes the effects of
heterogeneous beliefs and learning on international comovements of equity
returns and portfolio rebalancing mechanism. This essay develops a
continuous-time general equilibrium model in a two-asset and two-good economy
with two representative agents, who differ in perceived rates of output growth
and accuracy of beliefs. The equilibrium correlations of equity returns across
counties and optimal portfolios are expressed in terms of the differences in
beliefs. The main findings are: (1) the differences in perceived rates of
output growth generate equity home or foreign bias, resulting in lower cross-country
equity return correlations; and (2) the volatilities of optimal portfolios and
capital flows increase with the differences in perceived output growth and with
the differences in accuracy of beliefs. The second essay studies the effects of
trade costs in goods market on international comovements of equity markets and
those on equity home bias. This essay develops a continuous-time general
equilibrium model in a two-country, two-asset, and two-good setting where
international trade of goods is costly. I solve for the optimal portfolios and
the equilibrium correlations of cross-country equity returns and analyze how
they change depending on the size of trade costs, the coefficient of risk aversion,
and the elasticity of substitution between domestic and foreign goods. It is
found that the cross-country equity return correlations decrease with the size
of trade costs. This result is robust to different sizes of trade costs and
asymmetry related to potential growth and consumer preferences. It is also
found that the size of the trade costs and other parameter values determine
whether trade costs would generate equity home bias or foreign bias. The third
essay is devoted to an empirical analysis of the effects of financial
integration on international comovements of financial markets. The essay
provides a characterization of synchronization among 24 countries over the
period 1980-2003. A country-pair panel instrumental variables framework is employed
to explain time-varying bilateral correlations among national stock returns, by
utilizing the dataset on trade costs in Fitzgerald (2008). It is found that financial
integration driven by reduction of trade costs leads to a higher degree of
synchronization across stock markets.
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