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In 2011 all ECB publications feature a motif taken from the €100 banknote. NOTE: This Working Paper should not be reported as representing the views of the European Central Bank (ECB). The views expressed are those of the authors and do not necessarily reflect those of the ECB. This paper can be downloaded without charge from

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Whitelaw for helpful discussions. The usual disclaimer applies. This paper is an empirical investigation of the excess comovement of industry indexes in the U.S. stock market over the period January 1973 to December 2001. We define excess comovement as the correlation between two assets beyond what could be explained by fundamental factors. In our analysis, the fundamental factors are sector groupings and the three Fama-French factors. We then estimate excess comovement as the mean absolute correlation of residuals of univariate (OLS) or joint (FGLS) regressions of these fundamentals on industry returns. We show that excess unconditional comovement is surprisingly high (a lower bound of 0.134 and an upper bound of 0.357) and represents between 31 % and 83 % of the average raw absolute correlation. Excess comovement is also consistently significant across industries and over our entire sample interval. Furthermore, we findthatthedegreeofexcess comovement is symmetric, i.e., not significantly different in rising or falling markets. We explain approximately 21 % of this excess correlation by its positive relation to market volatility, and reveal a negative relation of its lower bound to the level of the short-term interest rate.

Emerging markets have long posed a challenge for finance. Standard models are often ill suited to deal with the specific circumstances arising in these markets. However, the interest in emerging markets has provided impetus for both the adaptation of current models to new circumstances in these markets and the development of new models. The model of market integration and segmentation is our starting point. Next, we emphasize the distinction between market liberalization and integration. We explore the financial effects of market integration as well as the impact on the real economy. We also consider a host of other issues such as contagion, corporate finance, market microstructure and stock selection in emerging markets. Apart from surveying the literature, this article contains new results regarding political risk and liberalization, the volatility of capital flows and the performance of emerging market investments.

Many previous studies of international markets have attempted to measure integration by correlations among broad stock market indexes. Yet such correlations have been found to poorly mimic other measures of integration. We show that a simple correlation between two stock markets is likely to be a poor indicator of integration for a very simple reason: when there are multiple factors driving returns, such as global macro factors or even industry factors, two markets can be perfectly integrated and yet still be imperfectly correlated. Perfect integration implies that the same international factors explain 100 % of the broad index returns in both countries, but if country indexes differ in their sensitivities to these factors, they will not exhibit perfect correlation. We derive a new integration measure based on the explanatory power of a multi-factor model and use it empirically to investigate recent trends in global integration. For most countries, there has been a marked increase in measured integration, but this is not indicated by simple correlations among country indexes.

Any opinions expressed here are those of the author(s) and not those of the IIIS. All works posted here are owned and copyrighted by the author(s). Papers may only be downloaded for personal use only. Shift versus traditional contagion in Asian markets

Any opinions expressed here are those of the author(s) and not those of the IIIS. All works posted here are owned and copyrighted by the author(s).

Any opinions expressed here are those of the author(s) and not those of the IIIS. All works posted here are owned and copyrighted by the author(s). Papers may only be downloaded for personal use only. Financial Contagion in Emerging Markets: Evidence from the Middle East and North Africa Thomas Lagoarde-Segot 1

The paper takes an asset pricing perspective to investigate the equity market comovement and contagion at the sector level during the period 1990-2004 across the regions of Europe, Asia and Latin America. It examines whether unexpected shocks from a particular market, or group of markets, are propagated to the sectors in other countries. The results confirm the sector heterogeneity of contagion. This implies that there are sectors which can still provide a channel for achieving the benefits of international diversification during crises despite the prevailing contagion at the market level. In addition, the results lend support to the importance of financial links in the propagation of contagion.