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Foreign Direct Investment as a Determinant of Cross-Country Stock Market Comovement

Author

Listed:
  • Anagnostopoulos, A.
  • Atesagaoglu, O.
  • Faraglia, E.
  • Giannitsarou, C.
Abstract
We develop a theoretical framework in order to investigate the link between two recent trends: (i) the rise in cross-country stock market correlations over the past three decades, and (ii) the increase in global foreign direct investment (FDI) positions over the same period. Our objective is twofold: first, we investigate empirically the channel through which the rise in global stock market correlations is associated with the observed increase in global FDI. Second, we develop a two-country stochastic asset pricing model with multinational firms that allows us to quantify the extent to which the recent rise in global FDI can account for the observed increase in cross-country stock market comovement. Calibrating three versions of the model (financial autarky, incomplete markets and complete markets) to the US and the rest-of-the-world, we find that a permanent increase in FDI positions, as observed from mid 1990s to mid 2000s, leads to substantial increase in cross-country stock market comovements. Increases in FDI alone can account for approximately one third of the observed increase in stock market correlations. We also discuss the role of portfolio diversification and, more generally, asset market integration.

Suggested Citation

  • Anagnostopoulos, A. & Atesagaoglu, O. & Faraglia, E. & Giannitsarou, C., 2019. "Foreign Direct Investment as a Determinant of Cross-Country Stock Market Comovement," Cambridge Working Papers in Economics 1978, Faculty of Economics, University of Cambridge.
    • Handle: RePEc:cam:camdae:1978
    Note: cg349, ef307
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    References listed on IDEAS

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    More about this item

    Keywords

    stock market comovements; foreign direct investment; business cycle synchronisation; multinational firms; asset pricing;
    All these keywords.

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles

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