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Equity Correlations and Globalization

Equity Correlations and Globalization. Prepared by: Marwan Cherri Carlos A. Farha Yuko Fujio Günther Maté Xu Wang. Globalization. Has the world become more economically integrated? How can the effect be measured? What are the implications for investors?. Outline. The Project

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Equity Correlations and Globalization

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  1. Equity Correlations and Globalization Prepared by: Marwan Cherri Carlos A. Farha Yuko Fujio Günther Maté Xu Wang Global Investments

  2. Globalization • Has the world become more economically integrated? • How can the effect be measured? • What are the implications for investors? Global Investments

  3. Outline • The Project • Methodology • Results: • Industry • Country • Conclusions Global Investments

  4. G7 Countries interaction 8 Industries Factors that drive stock returns Integration among countries Integration among industries Measurements of correlations and shocks The Project Analysis Investigate Global Investments

  5. Industry Indexes by Country from DS G7 Indexes per Industry G7 Index from MSCI as common factor Country Indexes from MSCI as country factors Methodology Factors Change in Return from t-1 to t Individual Market Cap t-1 Total Market Cap t-1 X Global Investments

  6. G7 Industry Returns on Common Factor Return 1 Global Residual 1 = + Residuals on Cross-Country Indexes Residual 1 Country Residual 2 = + Industry Among Countries Among Individual G7 Industries Methodology Two-Step Regression Industry Cross-Correlation Global Investments

  7. Results Mean Excess Returns Industry Country Global Investments

  8. Industry Results Average G7 Industry Cross-Correlation Global Investments

  9. Industry Results Change in Correlation over time Global Investments

  10. Industry Results Cross-Correlation Global Investments

  11. Industry Results Two-Step Approach Global Investments

  12. Results • Jan 89 to Mar 96 • Correlation declined • Changing world order • Emerging markets • Timing of recessions • April 1996 – to date • Correlation increased • Consolidation • Global competition • Technological changes Global Investments

  13. Country Results Absolute Country Factors Global Investments

  14. Country Results Jan 89 – Dec 92 Jan 93 – Dec 96 Jan 93 – Dec 96 Jan 97 – Feb 01 Jan 89 – Dec 92 Jan 97 – Feb 01 Global Investments

  15. Conclusions • Industry factors • Country Factors • Differences in relative size of effect • More pronounced for globally oriented industries • Cross-country diversification US EU Asia Global Investments

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