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Juliana Caicedo-llano and Catherine Bruneau
''Co-movements of international equity markets: a large-scale factor model approach''
( 2009, Vol. 29 No.2 )
We analyze the comovements of a set of country-sector indexes from 45 different countries studying their factor decomposition based on a PCA analysis for a large cross section framework. We derive a measure to analyze the comovements over time based on the part of variance explained by the main extracted factors and we apply the method from Bai and Ng to study the relevant number of factors. We conduct rolling estimations for the period 1994-2006 focusing on the set of emerging markets. We show that both, emerging and developed equity markets experienced increasing comovements over the period of study, reflecting the integration of those markets. We have estimated that the main factor accounts for 30\% and 20\% of the whole variation of each data set. We use the comovements to gauge integration in two different ways, both indicating higher integration for developed markets. Finally, we relate the comovements to a measure of diversification and we conclude that it is only possible to reduce 85\% of the average risk of an equity index by diversification at the end of the period compared to 95\% at the beginning for the set of emerging markets.
Keywords: Market Integration, Equity markets, International portfolio diversification, Emerging Markets, Principal Components Analysis, Factor Analysis
C1 - Econometric and Statistical Methods: General
Manuscript Received : Mar 24 2009 Manuscript Accepted : Jun 28 2009

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