NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Long-Term Global Market Correlations

William N. Goetzmann, Lingfeng Li, K. Geert Rouwenhorst

NBER Working Paper No. 8612
Issued in November 2001
NBER Program(s):   AP

In this paper we examine the correlation structure of the major world equity markets over 150 years. We find that correlations vary considerably through time and are highest during periods of economic and financial integration such as the late 19th and 20th centuries. Our analysis suggests that the diversification benefits to global investing are not constant, and that they are currently low compared to the rest of capital market history. We decompose the diversification benefits into two parts: a component that is due to variation in the average correlation across markets, and a component that is due to the variation in the investment opportunity set. There are periods, like the last two decades, in which the opportunity set expands dramatically, and the benefits to diversification are driven primarily by the existence of marginal markets. For other periods, such as the two decades following World War II, risk reduction is due to low correlations among the major national markets. From this, we infer that periods of globalization have both benefits and drawbacks for international investors. They expand the opportunity set, but diversification relies increasingly on investment in emerging markets.

download in pdf format
   (615 K)

email paper

This paper is available as PDF (615 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Published: William N. Goetzmann & Lingfeng Li & K. Geert Rouwenhorst, 2005. "Long-Term Global Market Correlations," Journal of Business, University of Chicago Press, vol. 78(1), pages 1-38, January.

Users who downloaded this paper also downloaded these:
Obstfeld w6559 The Global Capital Market: Benefactor or Menace?
French and Poterba w3609 Investor Diversification and International Equity Markets
Bekaert and Harvey w9510 Market Integration and Contagion
Cutler, Poterba, and Summers w3243 Speculative Dynamics and the Role of Feedback Traders
Harvey w4621 Predictable Risk and Returns in Emerging Markets
 
Publications
Activities
Meetings
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us