equity returns and integration is europe changing this paper analyses the consequences of the process of financial and economic integration on european equity markets it documents significant changes in fundamentals notably an increased synchronization of macroeconomic activities and a non negligible evolution in pricing with a decrease in the cost of capital and converging equity premiums as to equity returns themselves in the face of what could turn out to be long run upward trends in the correlations among both country and sector returns and a narrowing of the superiority of country factors the benefits to be gained from finding diversification opportunities at a more disaggregated level appear to be higher than ever copyright 2004 oxford university press

international corporate diversification and the cost of equity european evidence abstract this paper analyzes the impact of corporate international diversification cid on domestic and world betas through the notion of psychic distance between countries using a large european sample of 598 firms our findings indicate that this dimension significantly influences corporate risk exposure by isolating three additive components of the foreign sales ratio fsr we obtain the most significant results by geographically partitioning the sample provided that firms are further classified by sector our framework sheds new light on how the cid of firms belonging to sweden and the united kingdom as well as the consumer cyclical consumer non cyclical and information technology sectors sometimes can reduce and sometimes increase firm betas

implications of incomplete markets for international economies we develop a restriction that precludes implausibly high reward for risk in incomplete inter national economies to consider a theoretical problem that characterizes a lower bound on the covariance between stochastic discount factors sdfs subject to correct pricing the problem is analytically solvable and synthesizes domestic and foreign sdfs into spanned and unspanned components our novelty is that exchange rate growth need not equal the ratio of sdfs and that the sdf correlations are plausibly lowered exploiting the realities of cross country corre lations of macroeconomic quantities namely consumption wealth dividend growths and asset returns our empirical investigation refutes the speci cation of complete markets

international asset pricing and portfolio diversification with time varying risk we test the conditional capital asset pricing model capm for the world s eight largest equity markets using a parsimonious generalized autoregressive conditional heteroskedasticity garch parameterization our methodology can be applied simultaneously to many assets and at the same time accommodate general dynamics of the conditional moments the evidence supports most of the pricing restrictions of the model but some of the variation in risk adjusted excess returns remains predictable during periods of high interest rates our estimates indicate that although severe market declines are contagious the expected gains from international diversification for a u s investor average 2 11 percent per year and have not significantly declined over the last two decades

global pricing of equity global equity management has historically been structured around country asset allocation this approach was supported by the observations that the country factor is the major source of influence on stock price behavior and that the correlation between equity and currency is close to zero and unstable if a corporation is regarded as a portfolio of international activities however its stock price should be influenced by international factors in relation to the geographical breakdown of its activities rather than where its headquarters is located or its stock is traded we examined a large cross section of security prices and found that regional factors and currency factors have a strong influence on asset returns beyond that of domestic factors moreover the sensitivity of individual company returns to nondomestic factors is closely related to the extent of their international activities as proxied by the relative importance of foreign sales to total sales we review the implications of these findings

comovement in international equity markets a sectoral view abstract we investigate shifts in correlation patterns among international equity returns at the market level as well as the industry level we develop a novel bivariate garch model for equity returns with a smoothly time varying correlation and then derive a lagrange multiplier statistic to test the constant correlation hypothesis directly applying the test to weekly data from germany japan the uk and the us in the period 1980 2000 we find that correlations among the german uk and us stock markets have doubled whereas japanese correlations have remained the same both dates of change and speeds of adjustment vary widely across countries and sectors

the structure of european stock returns analysis of the daily localcurrency returns on 105 stocks from 11 european countries over the 1986 89 period reveals the importance of various market and sector factors to stock price volatility factor analysis as well as an analysis of variance with currency market and industry factors show that national stock market factors clearly dominate stock price variances even after adjusting for currency world stock market european stock market and industry trends

another look at the role of the industrial structure of markets for international diversification strategies abstract this paper re examines the extent to which gains from international diversification are due to differences in industrial structure across countries recent papers by roll 1992 journal of finance 47 3 42 and heston and rouwenhorst 1994 journal of financial economics 36 3 27 investigate this issue and find conflicting evidence using a new database the dow jones world stock index with coverage in 25 countries and over 66 industry classifications we decompose comprehensively both country and industrial sources of variation we confirm that little of the variation in country index returns can be explained by their industrial composition we also uncover differences in the proportion of variation in industry index returns that is captured by country and industry factors and discuss the implications for global diversification strategies

the effectiveness of international diversification whole markets versus sectors a hedging approach is used to examine the effect of sectoral factors on the effectiveness of international diversification by using data covering seven countries and various sectors we find that international diversification is more effective when assets from developed markets only are used and when multiasset portfolios are used instead two asset portfolios the results also reveal that international diversification across whole markets is more effective than diversification across sectors these results reflect the pattern of return correlation

portfolio manager behavior and global financial crises abstract i develop a two market agent based model to study how global portfolio managers affect global financial crises and stability first i create an agent based model where fund managers make their allocation decisions between two markets and a risk free asset based on the mean variance framework simulation results reveal that global managers do not create global financial crises second i extend the base model by incorporating insights from behavioral finance where risk is instead determined by fund manager losses simulation results reveal that slight global manager losses can trigger a widening of both markets risk premium accelerating the decline in asset prices worldwide statistical analysis reveals that global managers are a stabilizing force in smaller numbers however they become destabilizing in larger numbers the ability to reduce risk by diversifying across markets results in excessive risk taking if global managers exist in larger numbers systematic over leverage may result such that a deleveraging process can lead to the spreading of financial crises

international stock comovements with endogenous clusters abstract we examine international stock return comovements of country industry portfolios our model allows 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 compositions substantially changed over time with the emergence of clusters among european countries from the early 2000s the cluster component was the main driver of country industry portfolio returns for most of the sample except from the mid 2000s to the mid 2010s when the global component had a more prominent role

international competition and exchange rate shocks a cross country industry analysis of stock returns this article systematically examines the importance of exchange rate movements and industry competition for stock returns common shocks to industries across countries are more important than competitive shocks due to changes in exchange rates weekly exchange rate shocks explain almost nothing of the relative performance of industries using returns measured over longer horizons the importance of exchange rate shocks increases slightly and the importance of industry common shocks increases more substantially both industry and exchange rate shocks are more important for industries that produce internationally traded goods but the importance of these shocks is economically small for these industries as well economists journalists and politicians around the world argue that some of the industries in their country compete vigorously with the same industries in other countries and that exchange rate shocks affect their competitiveness in the united states it is routinely stated that some u s industries compete with japanese industries and that a depreciation of the yen is bad for these u s industries and good for the rival japanese industries if the yen falls trade tensions could intensify between the u s and japan as autos and machinery from japan gain a competitive edge 1 further the exchange rate literature shows that exchange rate shocks lead to persistent deviations from purchasing power parity 2 froot and klemperer 1989 and knetter 1989 1993 among others demonstrate that deviations from purchasing power parity lead to sharp changes in price markups and profit margins for exporters

exchange rate exposure and industry characteristics evidence from canada japan and the usa abstract this paper examines industry level exchange rate exposures for canada japan and the usa measuring exposure by adding the change in the exchange rate to the domestic market model of industry portfolio returns some industries in all three countries display significant exposures moreover for each country the exchange rate is important for explaining industry returns at the economy wide level to explore whether exchange rate exposures are systematically linked to the activities of the industries we model exposure as a function of industry characteristics for all three countries the relation between exposure and industry characteristics is broadly consistent with economic theory jel f3

correlations in price changes and volatility across international stock markets the short run interdependence of prices and price volatility across three major international stock markets is studied daily opening and closing prices of major stock indexes for the tokyo london and new york stock markets are examined the analysis utilizes the autoregressive conditionally heteroskedastic arch family of statistical models to explore these pricing relationships evidence of price volatility spillovers from new york to tokyo london to tokyo and new york to london is observed but no price volatility spillover effects in other directions are found for the pre october 1987 period article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

changing risks in global equity portfolios given recent changes in sector and style risk and in manager betting behavior in the global equity markets we analyzed the relative importance of the major active risk drivers and the implications of their relative importance for global multimanager portfolio construction using cross sectional regressions and multimanager portfolio simulations we found that the effect of style and sector bets on active manager risk increased after 1998 and that using style balanced portfolios could have substantially reduced active risk during the 1998 2002 period most of the risk reduction however would have come from the diversification of stock sector selection risk because growth and value managers make different bets on certain sectors common bets on major countries such as japan or the united states persisted during this period but their importance decreased because of smaller benchmark relative bets and country risk in light of the changes using multiple risk control strategies to construct multimanage

dynamic stock market covariances in the eurozone abstract this paper examines the short term dynamics macroeconomic sensitivities and longer term trends in the variances and covariances of national equity market index daily returns for eleven countries in the euro currency zone we modify colacito engle and ghysel s mixed data sampling dynamic conditional correlation garch model to include a new scalar measure for the degree of correlatedness in time varying correlation matrices we also explore the robustness of the findings with a less model dependent realized covariance estimator we find a secular trend toward higher correlation during our sample period and significant linkages between macroeconomic and market wide variables and dynamic correlation one notable finding is that average correlation between these markets is lower when their average gdp growth rate is lower or when more of them have negative gdp growth

does industrial structure explain the benefits of international diversification abstract we examine the influence of industrial structure on the cross sectional volatility and correlation structure of country index returns for 12 european countries between 1978 and 1992 we find that industrial structure explains very little of the cross sectional difference in country return volatility and that the low correlation between country indices is almost completely due to country specific sources of return variation diversification across countries within an industry is a much more effective tool for risk reduction than industry diversification within a country

does institutional ownership matter for international stock return comovement funding portuguese foundation for science and technology fct uid ges 00407 2013 ptdc iim fin 2977 2014 and european research council

international diversification strategies revisited from the risk perspective following roll roll r 1992 industrial structure and comparative behaviour of international stock market indices journal of finance 47 3 42 and heston and rouwenhorst heston s l rouwenhorst g k 1994 does industrial structure explain the benefits of international diversification journal of financial economics 36 3 27 researchers have decomposed stock returns into country and industry components evidence suggests that industry components have become more important in recent years but the reasons for this are unclear existing research concentrated mainly on stock returns in industrial countries in this paper we consider instead the decomposition of stock risks within emerging equity markets we provide a rationale for this procedure and its relationship to return decompositions the results provide new firm specific evidence on the debate over country and industry components their stability over time and the implications for portfolio diversification

sector effects in developed vs emerging markets this examination of developed and emerging markets suggests that toward the end of the 20th century sector effects caught up with country effects in the developed markets of the world as a result of rising sector effects rather than declining country effects for emerging markets however country effects have remained the dominant influence relative to sector effects although the importance of country effects has been on a steady decline these results confirm that international equity managers should emphasize sector based approaches when investing in the developed countries but should continue country based allocation strategies in emerging markets

country and industry concentration and the performance of international mutual funds abstract we examine the relation between country and industry portfolio concentration and performance using a data set of international equity mutual funds when sorted by concentration measures funds in the most concentrated quintile outperform those in the most diversified quintile by 0 16 and 0 30 monthly in country and industry dimensions respectively further analysis shows that the superior performance of concentrated funds is largely driven by industry rather than country concentration suggesting the existence of global industry private information finally we show that industry concentrated funds rotate top holding industries less frequently than their diversified counterparts and that the industries these funds purchase subsequently outperform the industries they sell

empirical evidence for the superiority of non us oil and gas investments abstract this paper provides empirical estimates of the return on us and non us exploration investment the estimates are obtained from a polynomial distributed lag model econometrica 33 1965 178 that relates the present value of current period reserve discoveries to current and lagged us and non us exploration investment the empirical evidence presented in the paper indicates that the net present value of 1 invested in non us exploration is larger in a statistically significant sense than the net present value of 1 invested in u s exploration in particular results indicate that the return on non us exploration investment is approximately 3 5 times as large as the return earned on us exploration investment the results reported in this paper provide insights potentially useful to us energy policymakers

country v sector effects in equity returns and the roles of geographical and firm size coverage since roll the journal of finance 47 1 3 41 1992 and heston and rouwenhorst journal of financial economics 36 3 27 1994 there has been a debate whether country factors in international stock returns are typically more variable than sector factors the addition of emerging markets ems does boost the ratio of country factor variance relative to industry factor variance these markets have a higher variability but are also less related to global factors investigating to what extent this phenomenon can be tracked down to the impact of adding more small firms we find the following 1 small firms do have higher volatility but only after controlling for country and sector affiliation 2 small firms do have weaker sector affinity as expected 3 small firms unexpectedly have weaker local market sensitivities than large firms facts 2 and 3 mean that adding more small firms to the data base has a diversifying effect on both the sector and country factor variance while the impact on sector variance is larger the net effect turns out to be tiny 4 adding emerging markets has a very marked impact on the variance ratio in fact the addition of small stocks to the sample hardly dents the effect of adding ems thus the role of ems cannot be reduced to just a small firm phenomenon

the rise of sector effects in major equity markets historically country effects have been dominant in explaining variations in global stock returns even in the developed markets and investors have segmented their allocations accordingly we set out to investigate whether this situation still prevails we found a significant shift in the relative importance of national and economic influences in the stock returns of the world s largest equity markets in these markets the impact of industrial sector effects is now roughly equal to that of country effects in addition to supporting the notion of increasing global capital market integration these findings suggest that country based approaches to global investment management may be losing their effectiveness

identification and estimation in non fundamental structural varma models the basic assumption of a structural vector autoregressive moving average svarma model is that it is driven by a white noise whose components are uncorrelated or independent and can be interpreted as economic shocks called structural shocks when the errors are gaussian independence is equivalent to non correlation and these models face two identification issues the first identification problem is static and is due to the fact that there is an infinite number of linear transformations of a given random vector making its components uncorrelated the second identification problem is dynamic and is a consequence of the fact that even if a svarma admits a non invertible moving average ma matrix polynomial it may feature the same second order dynamic properties as a varma process in which the ma matrix polynomials are invertible the fundamental representation the aim of this paper is to explain that these difficulties are mainly due to the gaussian assumption and that both identification challenges are solved in a non gaussian framework if the structural shocks are assumed to be instantaneously and serially independent we develop new parametric and semi parametric estimation methods that accommodate non fundamentalness in the moving average dynamics the functioning and performances of these methods are illustrated by applications conducted on both simulated and real data

on the structure of analyst research portfolios and forecast accuracy this study provides insights into the forces and constraints that shape analyst research coverage along country and sector dimensions and the impact of the structure of an analyst s portfolio on forecast accuracy we find that analyst specialization by country and sector is sensitive to the extent to which firms within a country or sector and firms across country sectors are exposed to common economic forces the potential for revenue generation and broker culture our tests indicate that existing research on the relation between analyst portfolio structure and forecast accuracy may suffer from an endogeneity bias we use our analysis of analyst specialization to develop controls for this bias once we employ these controls we find that country diversification is associated with superior forecast accuracy however the relation between sector diversification and forecast accuracy is context specific specifically sector diversification enhances forecast accuracy in an international context while it detracts from forecast accuracy in a domestic u s context

increasing synergies between institutions and technology developers lessons from marine energy abstract this paper describes innovation activities in the marine energy sector across ten european countries in 2011 intense knowledge creation occurred in the uk and northern european countries while european research networks encouraged public private partnerships facilitating knowledge diffusion an analysis based on a technological innovation system tis has identified challenges for the system to evolve from one phase of development to another i e from pre development to take off phase in order for marine energy to pass successfully through the commercialisation valley of death entrepreneurial experimentation and production is crucial entrepreneurial initiatives were developed mainly in the united kingdom denmark norway and ireland whereas france germany and sweden were active through venture capital initiatives additional system builders such as the authorities in charge of energy policies could offer guidance for research ensure legitimacy and effectively mobilise resources for system development although public support was efficient in stimulating private investment national targets seemed less efficient in creating a long time horizon for private investors due to consecutive unexpected changes in contrast positive interactions between technology developers and policy makers could empower market formation ultimately the creation of a policy community also involving local communities could foster a positive environment for the development of innovation activities

stock market synchronization and monetary integration abstract this paper focuses on the relationship between stock market comovements and monetary integration a panel specification is used to explain bilateral stock market return correlations between fifteen developed economies over the period 1975 2006 time fixed effects are included to capture global shocks and we also examine the role of bilateral trade linkages and international financial integration monetary integration leads to stronger stock market synchronization both through the elimination of exchange rate volatility and through the common monetary policy and the convergence of inflation expectations trade and financial integration also contribute to higher stock market return comovements

factor decomposition and diversification in european corporate bond markets in this paper we present an analysis of diversification strategies on portfolios of european corporate bonds from the perspective of a us based investor we study whether mean variance diversification strategies change as a result of the introduction of the european economic and monetary union emu using a comprehensive and unique data set of european corporate bonds we show that country factors are more important than industry factors to describe the cross section of european corporate bonds in particular we find that in the post emu period country factors remain important

excess comovement in international equity markets evidence from cross border mergers we examine the changes in betas from international mergers we find that the beta with respect to the acquirer s home market rises and that with respect to the target s home market falls the effect is large and robust with respect to controls for changes in the operations of the companies involved such an effect can occur only if international equity markets are not integrated we also find that the effect has not reduced over time that cross listings do not generally have a significant effect on international betas and that the u s and u k are more integrated internationally than other markets

asymmetric stationarity in national stock market indices an mtar analysis a procedure is developed using a momentum threshold autoregressive model and asymmetric stationarity tests designed to identify periods of asymmetric stationary divergences from nonstationary paths in time series and is applied to major national stock indices the results reveal the existence of asymmetric stationary periods in each of these indices these results suggest an explanation for the counterintuitive positive forecasting results of technical traders for various time periods we explore this possibility further by using a representative moving average technical trading strategy and find significantly different results higher returns when information from the procedure is incorporated into a trading rule

a theory of demand shocks this paper presents a model of business cycles driven by shocks to consumer expectations regarding aggregate productivity agents are hit by heterogeneous productivity shocks they observe their own productivity and a noisy public signal regarding aggregate productivity the public signal gives rise to noise shocks which have the features of aggregate demand shocks they increase output employment and inflation in the short run and have no effects in the long run numerical examples suggest that the model can generate sizable equilibrium dsge models of the business cycle include a large number of shocks to technol ogy monetary policy preferences etc but typically do not include expectational shocks as independent drivers of short run fluctuations 1 this paper explores the idea of expectation driven cycles looking at a model where technology determines equilibrium output in the long run and consumers receive noisy signals about technology in the short run the presence of noisy signals produces expectational errors this paper studies the role of these expectational errors in gener ating volatility at business cycle frequencies the model is based on two ingredients first consumers take time to recognize permanent changes in aggregate fundamentals although they may have good information on the current state of the individual firm or sector where they operate they have only limited information regarding the long run determinants of aggregate activity second consumers have access to public information that is relevant to estimate long run productivity this includes news about technological innovations publicly released macroeconomic and sectoral statistics financial market prices and public statements by policy makers however these signals provide only a noisy forecast of the long run effects of technological innovations this opens the door to noise shocks which induce consumers to temporarily overestimate or underestimate the productive capacity of the economy

the effects of market segmentation and investor recognition on asset prices evidence from foreign stocks listing in the united states non u s firms cross listing shares on u s exchanges as american depositary receipts earn cumulative abnormal returns of 19 percent during the year before listing and an additional 1 20 percent during the listing week but incur a loss of 14 percent during the year following listing we show how these unusual share price changes are robust to changing market risk exposures and are related to an expansion of the shareholder base and to the amount of capital raised at the time of listing our tests provide support for the market segmentation hypothesis and merton s 1987 investor recognition hypothesis the globalization of u s capital markets has accelerated dramatically in the past decade increasing numbers of companies from overseas have chosen to either raise capital through global equity issues or prepare for future capital raising by way of cross listings on u s exchanges as of 1997 about 1 300 non u s companies have listed their shares for trading on the new york stock exchange nyse the american exchange amex the national association of securities dealers automation quotation nasdaq system or

pricing of domestic versus multinational companies world financial markets are becoming integrated hence global factors rather than domestic factors should dominate the pricing of stocks all the empirical studies published until the mid 1990s however reported that stock prices respond primarily to domestic factors in other words the pricing of a company s stock is driven predominantly by the primary location of its stock listing rather than by the nature and geographical breakdown of its activities we challenge this vision of international market pricing we have found that stock pricing at least for non u s companies is strongly influenced by the extent of the company s nondomestic activities this finding has implications for the organization of global equity research departments and for the structure of the investment process

have world country and industry risks changed over time an investigation of the volatility of developed stock markets this paper uses a volatility decomposition method to study the time series behavior of equity volatility at the world country and local industry levels between 1974 and 2001 there is no noticeable long term trend in any of the volatility measures then in the 1990s there is a sharp increase in local industry volatility compared to market and country volatility thus correlations among local industries have declined more assets are needed to achieve a given level of diversification and there is more of a penalty for not being well diversified by industry local industry volatility leads the other volatility measures

the cost of capital in international financial markets local or global abstract this paper analyzes to what extent international and domestic asset pricing models lead to a different estimate of the cost of capital for an individual firm under the maintained assumption of perfect international financial integration we distinguish between i the multifactor solnik sercu icapm including both the global market portfolio and exchange rate risk premia and ii the single factor domestic capm we use a sample of 3 293 stocks from nine countries in the period 1980 1999 the domestic capm yields a significantly different estimate of the cost of capital from the multifactor icapm for only five percent of the firms in our sample we attribute the close correspondence between local and global pricing to strong country factors in individual stock returns which are probably due to lack of real integration our results reinforce the home bias puzzle

information transmission between the nasdaq and asian second board markets abstract in the 1980s and early 1990s the nasdaq s success helped to prompt singapore sesdaq japan jasdaq taiwan taisdaq and south korea kosdaq to set up or formalize their own second board markets in 1999 malaysia mesdaq and hong kong gem followed suit given the growing importance of these second board markets we examine whether there is any evidence of spillovers from nasdaq returns and volatilities to asian second board market returns and volatilities after controlling for spillovers from the nyse and whether these cross country spillovers are strong relative to domestic spillovers from the corresponding main board markets we employ egarch models dynamic causality tests and var based forecast error decompositions using daily data of a recent sample period that includes the asian financial crisis of 1997 and continues until april 20 2001 there is strong evidence of lagged returns and volatility spillovers from the nasdaq market to the asian second board markets when we exclude contemporaneous main board market returns there is also strong evidence of contemporaneous and lagged returns and volatility spillovers from the local main board markets to the corresponding second board markets however even in the presence of contemporaneous main board market returns there are substantial spillovers from the lagged nasdaq returns and volatilities to asian second board market returns and volatilities these findings are not sensitive to whether we use us dollar based data or local currency based data given the difference in the trading hours between the nasdaq and asian stock markets we use available intra day return data and canadian return data the findings seem quite robust there is substantial information spillover from the nasdaq to the asian and canadian second board markets these findings indicate the existence of a substantial cross country industry effect or meteor shower effect as well as a domestic market effect or heat wave effect and imply that both country diversification and industry diversification are important

international portfolio diversification currency industry and country effects revisited we examine the relative importance of country industry world market and currency risk factors for international stock returns our approach focuses on testing the mean variance efficiency of the various factor portfolios an unconditional analysis does not show significant differences between country industry and world portfolios nor any role for currency risk factors however when we allow expected returns volatilities and correlations to vary over time we find that equity returns are mainly driven by global industry and currency risk factors we propose a novel test to evaluate the relative benefits of alternative investment strategies and find that including currencies is critical to take full advantage of the diversification benefits afforded by international markets

why do markets move together an investigation of u s japan stock return comovements this article explores the fundamental factors that affect cross country stock return correlations using transactions data from 1988 to 1992 we construct overnight and intraday returns for a portfolio of japanese stocks using their nyse traded american depository receipts adrs and a matched sample portfolio of u s stocks we find that u s macroeconomic announcements shocks to the yen dollar foreign exchange rate and treasury bill returns and industry effects have no measurable influence on u s and japanese return correlations however large shocks to broadbased market indices nikkei stock average and standard and poor s 500 stock index positively impact both the magnitude and persistence of the return correlations stock return cross country covariances play a key role in international finance changes in these covariances affect the volatility of portfolios and asset prices as these covariances increase one expects that a fewer domestic risks are internationally diversifiable so portfolio volatility increases b the risk premium on the world market portfolio increases 1 c the cost of capital increases for individual firms and d the domestic version of the capm becomes increasingly inadequate 2 despite the important economic consequences of changes in cross country covariances the determinants of the levels and dynamics of these covariances have been little studied from an academic

mean variance convergence around the world abstract in this paper we show i that the risk return characteristics of our sample of 17 developed stock markets of the world have converged significantly toward each other during our study period 1974 2007 and ii that this international convergence in risk return characteristics is driven mainly by the declining country effect rather than the rising industry effect suggesting that the convergence is associated with international market integration specifically we first compute the risk return distance among international stock markets based on the euclidean distance and find that the distance thus computed has been decreasing significantly over time implying a mean variance convergence in particular the average risk return distance has decreased by about 50 over our sample period we also document that the risk return characteristics of our sample of 14 emerging markets have been converging rapidly toward those of developed markets in recent years this development notwithstanding emerging markets still remain as a distinct asset class lastly we show that the convergence in risk return characteristics has exerted a negative impact on the efficiency of international investment during our sample period

exchange rates and prices the adjustment of relative prices to exchange rate movements is explained in an industrial organization approach given labor costs in the respective currencies exchange rate movements change costs for firms selling in the home market and thus disturb the industry equilibrium the extent of absolute and relative price adjustment is shown to depend on market integration product substitutability the relative number of domestic and foreign firms and the market structure the impact of exchange rates on prices is illustrated in a variety of approaches including the cournot a dixit and j stiglitz 1977 and s salop 1979 models some empirical evidence is offered in support of the theory copyright 1987 by american economic association