Statistical and Graphical Example

Example 4: Evidence on international stock market correlations

 

The following table shows stock market return correlation coefficients for six developed economies from 1973 through 2006. Recall from our definition section above, a correlation coefficient shows the strength of association between two variables. The variables in this case are monthly stock market returns. 

 

We see some interesting results. Canada and the U.S. share the highest correlation at 0.72. This is due to the fact that Canada is the largest trading partner of the U.S. Also many stocks that trade in the U.S. simultaneously trade on the Toronto Stock Exchange. But we see that there are other high correlations with the U.S. as well. Also we see that many of the European countries show high correlations. 

 

The general conclusion is that the world stock market is reasonably financially integrated. This is an off-shoot of the fact that the world is becoming more globally integrated in all markets, not just financial markets. From a diversification perspective these results would suggest that diversification benefits, while still present, are not as strong as they once were.

 

Source: Fasnacht and Louberge (2011). Working paper, University of Geneva.  

 

 

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