Time-varying risk preferences and emerging market co-movements

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Abstract

This paper examines how shocks can transmit across international stock markets through the channel of time-varying investor risk preferences. We highlight the effects of this channel by comparing the conventional constant relative risk aversion utility function with the habit-formation utility function of Campbell and Cochrane (J. Pol. Econ. 107 (1999) 205). Calibrating our model with data from Argentina, Korea and Mexico, we find that in the presence of time-varying investor risk preferences, market integration generates a substantial increase in cross-country co-movements of stock returns.
Original languageEnglish
Pages (from-to)1053-1072
Number of pages20
JournalJournal of International Money and Finance
Volume21
Issue number7
DOIs
Publication statusPublished - 1 Dec 2002
Externally publishedYes

Keywords

  • Correlations and co-movements
  • Emerging market stock returns
  • Financial market integration
  • Habit-formation
  • Time-varying risk preferences

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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