EMG Working Paper Series WP - EMG - 05 - 2007 ‘ International Stock Return Comovements

We examine international stock return comovements using country-industry and country-style portfolios. We first establish that parsimonious risk-based factor models capture the covariance structure of the data better than the popular Heston-Rouwenhorst (1994) model. We then establish the following stylized facts regarding stock return comovements. First, we do not find evidence for an upward trend in return correlations, excpet for the European stock markets. Second, the increasing imporatnce 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. Geert Bekaert Graduate School of Business Columbia University New York, NY 10027 and NBER [email protected] Robert J. Hodrick Graduate School of Business Columbia University New York, NY 10027 and NBER [email protected] Xiaoyan Zhang Johnson Graduate School of Management Cornell University Ithaca, NY 14853 [email protected]