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NBER Working Papers and Publications
|May 1990||Volatiltiy and Links Between National Stock Markets|
with Mervyn King, Sushil Wadhwani: w3357
The empirical objective of this study is to account for the time-variation the covariances between markets. Using data on sixteen national stock markets, we estimate a multivariate factor model in which the volatility of returns is induced by changing volatility in the orthogonal factors. Excess returns are assumed to depend both on innovations in observable economic variables and on unobservable factors. The risk premium on an asset is a near combination of the risk premia associated with factors. The main empirical finding is that only a small proportion of the time variation in the covariances between national stock markets can be accounted for by observable economic variables. Changes in correlations markets are given primarily by movements in unobservable variables. We also estimate t...
Published: Econometrica, vol 62, no. 4, (July 1994) pp. 901-933 citation courtesy of