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Global Equity Correlation in International Markets

Last Updated on 10 February, 2024 by Rejaul Karim

The research paper “Global Equity Correlation in International Markets” by Joon Woo Bae and Redouane Elkamhi presents compelling empirical evidence establishing the innovation in global equity correlation as a potent pricing factor in international markets.

The study proffers a stylized model to substantiate the rationale behind this factor’s candidacy, alongside proposing a straightforward method to assess it.

Notably, the research reveals that the factor demonstrates a robust negative price of risk and substantially enhances joint cross-sectional fits across diverse asset classes, encompassing global equities, commodities, sovereign bonds, foreign exchange rates, and options.

Furthermore, the exploration of this factor’s pricing efficacy in the FX market sheds illuminating insights on the interconnection between international equity and currency markets.

The research posits global equity correlations as a linchpin for aggregate risks, delving into their pivotal role in linking international equity and currency markets.

This multifaceted inquiry offers a profound understanding of the intricate dynamics underpinning global market interactions, enriching our comprehension of pricing factors and market linkages.

Abstract Of Paper

We present empirical evidence that the innovation in global equity correlation is a viable pricing factor in international markets. We develop a stylized model to motivate why this is a reasonable candidate factor and propose a simple way to measure it. We find that our factor has a robust negative price of risk and significantly improves the joint cross-sectional fits across various asset classes, including global equities, commodities, sovereign bonds, foreign exchange rates, and options. In exploring the pricing ability of our factor on the FX market, we also shed light on the link between international equity and currency markets through global equity correlations as an instrument for aggregate risks.

Original paper – Download PDF

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Author

Joon Woo Bae
Case Western Reserve University – Weatherhead School of Management

Redouane Elkamhi
University of Toronto – Rotman School of Management

Conclusion

In conclusion, the research paper “Global Equity Correlation in International Markets” by Joon Woo Bae and Redouane Elkamhi illuminates the compelling empirical evidence that establishes the innovation in global equity correlation as a potent pricing factor in international markets.

The study employs a stylized model to reinforce the plausibility of this factor and presents a straightforward method for its measurement.

The research underscores the factor’s robust negative price of risk and its significant enhancement of joint cross-sectional fits across a spectrum of asset classes, spanning global equities, commodities, sovereign bonds, foreign exchange rates, and options.

Moreover, the exploration of this factor’s influence on the FX market unveils its elucidating role in bridging international equity and currency markets, elucidating global equity correlations as pivotal instruments for aggregate risk.

This in-depth investigation offers a nuanced perspective on the complex dynamics governing global market interactions, advancing our understanding of pricing factors and the interlinkages between international markets.

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Cross-Sectional Return Dispersion and Currency Momentum

Currency Momentum Strategies

FAQ

Q1: What is the main focus of the research paper “Global Equity Correlation in International Markets” by Joon Woo Bae and Redouane Elkamhi?

A1: The main focus of the research paper is to provide empirical evidence establishing the innovation in global equity correlation as a viable pricing factor in international markets. The study explores the pricing ability of this factor and its impact on various asset classes, including global equities, commodities, sovereign bonds, foreign exchange rates, and options.

Q2: What does the stylized model developed in the research aim to accomplish?

A2: The stylized model is developed to motivate and substantiate why global equity correlation is a reasonable candidate factor for pricing in international markets. It aims to provide a conceptual framework for understanding the rationale behind the factor’s candidacy as a pricing factor.

Q3: How does the proposed factor perform in terms of price of risk, and what asset classes does it substantially enhance joint cross-sectional fits across?

A3: The proposed global equity correlation factor demonstrates a robust negative price of risk. It substantially enhances joint cross-sectional fits across various asset classes, including global equities, commodities, sovereign bonds, foreign exchange rates, and options.

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