Global Equity Correlation in International Markets

Abstract

We present empirical evidence that the innovation in global equity correlation is a viable pricing factor in international markets. We develop a stylized model to motivate why this is a reasonable candidate factor and propose a simple way to measure it. We find that our factor has a robust negative price of risk and significantly improves the joint cross-sectional fits across various asset classes, including global equities, commodities, sovereign bonds, foreign exchange rates, and options. In exploring the pricing ability of our factor on the FX market, we also shed light on the link between international equity and currency markets through global equity correlations as an instrument for aggregate risks. This paper was accepted by Karl Diether, finance.

International trade and investment: A review and research agenda

“…Most of the conceptual articles used case studies to articulate the concepts or develop a model (Brandwayn, 1993;Hamada, 1989;Pempel, 2000;Vos & Van Den Berg, 1996). The reviewed studies consist of different tools and techniques used for the analysis, like difference in difference analysis, stress testing, the GARCH model, Bayesian econometric procedures, the Granger causality test, and so forth, but 30% of the studies used regression (Bae & Elkamhi, 2021;Branstetter & Feenstra, 2002;Contractor et al, 2021;Pathak et al, 2015;Shi et al, 2022). Investment-related studies are linked to various domains like corruption, future viability, entrepreneurship, trade openness, and risk management (Contractor et al, 2021;Cuervo-Cazurra et al, 2020;Grosse et al 2021;Pathak et al, 2015), which provide extensions to the studies conducted by Liao et al (2022) and Sivalogathasan and Wu (2014).…”

“…Risk assessment enables decision‐making by integrating numerous complex data sets with discrepancies in accuracy and varied subsequent values (Gambrill & Shlonsky, 2000). When it comes to international settings, the assessment of risk becomes more crucial as corporations focus mostly on the risk associated with a variety of assets, such as sovereign bonds, foreign exchange rates, options, and global equities (Bae & Elkamhi, 2021), and invest with less consideration for political and social risks (Yackee, 2013) . Corruption, unilateral power arrangements, and a lack of a strong rule of law are the risk factors that discourage MNCs from investing abroad (Deghetto et al., 2020).…”

“…Several researchers have investigated various facets of international trade and investment. Contemporary literature on various aspects of international trade and investment is available, like globalization and investment (Burgoon & Raess, 2011; Rock et al., 2009), the role of foreign direct investment (FDI) in developing economies (Branstetter & Feenstra, 2002; Contractor et al., 2021), the strategic significance of international trade (Brandwayn, 1993; Shi et al., 2022), export competition and productivity (Razin et al., 2003; Vos & Van Den Berg, 1996), international cooperation among developing nations (Che et al., 2015; Kleinberg & Fordham, 2010), and risk assessment (Bae & Elkamhi, 2021; Liu et al, 2017, ). With the onset of the COVID 19 pandemic in 2020, the impact on international trade and investment was observed to be similar to that of the 2008−2009 financial crisis and significantly worse than that of the recession of 2015 (UNCTAD, 2022b), which has prompted more research endeavors focused on investigating this particular domain.…”

How Government Size Expansion Can Affect Green Innovation—An Empirical Analysis of Data on Cross-Country Green Patent Filings

“…Exchange rate (Xr): As one of the main external environmental factors for green innovation, exchange rate fluctuations can change relative prices and competition in the international market [ 64 ]. This can encourage enterprises to reduce the cost of importing intermediate goods through technological upgrading, changing original production methods, and accelerating new product R&D, in turn affecting the level of technological innovation in a country [ 65 ].…”