International Stock Comovements with Endogenous Clusters

Coroneo, Laura; Jackson, Laura E.; Owyang, Michael T.

doi:10.20955/wp.2018.038

Working Paper

International Stock Comovements with Endogenous Clusters

Abstract: We use an endogenous cluster factor model to examine international stock return comovements of country-industry portfolios. Our model allows country-industry portfolio comovements to be driven by a global and a cluster component, with the cluster membership endogenously determined. Results indicate that country-industry portfolios tend to cluster mainly within geographical areas that can include one or more countries. The cluster component was the main driver of country-industry portfolio returns for most of the sample, except from mid-2000 to mid-2010s when the global component had a more prominent role. At the end of the sample, a large cluster among European countries emerges.

Keywords: diversification; risk; international financial markets; clustered factor model;

JEL Classification: C38; G15;

https://doi.org/10.20955/wp.2018.038

Status: Published in Journal of Economic Dynamics & Control