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Federal Reserve Bank of St. Louis
Working Papers
International Stock Comovements with Endogenous Clusters
Laura Coroneo
Laura E. Jackson
Michael T. Owyang
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.


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Laura Coroneo & Laura E. Jackson & Michael T. Owyang, International Stock Comovements with Endogenous Clusters, Federal Reserve Bank of St. Louis, Working Papers 2018-38, 24 Oct 2018.
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Keywords: diversification; risk; international financial markets; clustered factor model
DOI: doi.org/10.20955/wp.2018.038
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