Why Do Markets Move Together? An Investigation of U.S.-Japan Stock Return Comovements




    Associate Professor of FinanceSearch for more papers by this author
    • Karolyi is Associate Professor of Finance and Stulz is Reese Chair of Monetary Economics and Banking at the Fisher College of Business, Ohio State University, Columbus. The second author is also a research associate of NBER. We are grateful to Bong-Chan Kho and Shane Corwin for research assistance and Louis Ederington and Jae Ha Lee for providing us with the dates of macroeconomic announcements. We have benefited from comments by John Campbell, John Cochrane, Rob Engle, Louis Gagnon, Cam Harvey, Ked Hogan, Ravi Jagannathan, Jianping Mei, Victor Ng, Rob Stambaugh, Mike Urias, Albert Wang, and participants at the High Frequency Data in Finance Conference (Zurich), NBER Universities Research Conference on Financial Risk Assessment, Georgia Tech Global Investment Forum, 1995 Asia Pacific Finance Association meetings (Hong Kong), Columbia Conference on Japanese Financial Markets, the 1996 AFA meetings in San Francisco, and seminars at the Limburg Institute of Financial Economics, the Hong Kong University of Science and Technology, the University of California at Berkeley, New York University, and the University of Illinois. Karolyi thanks the Dice Center for Financial Economics for financial support.


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 broad-based market indices (Nikkei Stock Average and Standard and Poor's 500 Stock Index) positively impact both the magnitude and persistence of the return correlations.