Saita, Hyun Song Shin, and participants at the Bank of England/LSE conference on sources of contagion, a seminar

We examine international stock return comovements using country-industry and country-style portfolios as the base portfolios. We first establish that parsimonious risk-based factor models capture the covariance structure of the data better than the popular Heston-Rouwenhorst (1994) model. We then establish the following stylized facts regarding stock return comovements. First, we do not find evidence for an upward trend in return correlations, except for the European stock markets. Second, the increasing importance of industry factors relative to country factors was a short-lived, temporary phenomenon. Third, we find that large growth stocks are more correlated across countries than are small value stocks, and that the difference has increased over time. JEL Classification: C52, G11, G12.

This study examines how heterogeneity of private information may induce finan-cial contagion. Using a model of multi-asset trading in which the three main channels of contagion through financial linkages in the literature (correlated information, correlated liquidity, and portfolio rebalancing) are ruled out by construction, I show that financial contagion can still be an equilibrium outcome when speculators receive heterogeneous fundamental information. Risk-neutral speculators trade strategically across many assets to mask their information advantage about one asset. Asymmetric sharing of information among them prevents rational market makers from learning about their indivi-dual signals and trades with sufficient accuracy. Incorrect cross-inference about terminal payoffs and contagion ensue. When used to analyze the transmission of shocks across countries, my model suggests that the process of generation and disclosure of information in emerging markets may explain their vulnerability to financial contagion (JEL D82, G14, G15). Many recent financial crises were initiated by episodes of ‘‘local’ ’ turmoil

We provide new evidence on the channels through which …nancial shocks are transmitted across international borders. Employing monthly data from 1996 to 2008 on over 1,000 developed country-domiciled mutual and hedge funds, we show that outside investors’‡ows of money to these funds translate into signi…cant changes in their portfolio allocations in 25 emerging markets. Despite funds’e¤orts to ameliorate the price impact of these forced portfolio allocation shifts, they substantially impact emerging market equity returns, and are associated with increases in co-movement between emerging and developed markets. A special thanks to Simon Ringrose and Emerging Portfolio Fund Research (EPFR) for providing the data and for numerous helpful discussions. Thanks to Matthew Ringgenberg for research assistance; to Viral Acharya, John

In 2011 all ECB publications feature a motif taken from the €100 banknote. NOTE: This Working Paper should not be reported as representing the views of the European Central Bank (ECB). The views expressed are those of the authors and do not necessarily reflect those of the ECB. This paper can be downloaded without charge from

In 2009 all ECB publications feature a motif taken from the €200 banknote. This paper can be downloaded without charge from

publications feature a motif taken from the €5 banknote. noTe: This Working Paper should not be reported as representing the views of the European Central Bank (ECB). The views expressed are those of the authors and do not necessarily reflect those of the ECB.

publications feature a motif taken from the €5 banknote. NOTE: This Working Paper should not be reported as representing the views of the European Central Bank (ECB). The views expressed are those of the authors and do not necessarily reflect those of the ECB. Macroprudential Research Network This paper presents research conducted within the Macroprudential Research Network (MaRs). The network is composed of economists from the European System of Central Banks (ESCB), i.e. the national central banks of the 27 European Union (EU) Member States and the European Central Bank. The objective of MaRs is to develop core conceptual frameworks, models and/or tools supporting macro-prudential supervision in the EU. The research is carried out in three work streams: 1) Macro-financial models linking financial stability and the performance of the economy; 2) Early warning systems and systemic risk indicators; 3) Assessing contagion risks.

Whitelaw for helpful discussions. The usual disclaimer applies. This paper is an empirical investigation of the excess comovement of industry indexes in the U.S. stock market over the period January 1973 to December 2001. We define excess comovement as the correlation between two assets beyond what could be explained by fundamental factors. In our analysis, the fundamental factors are sector groupings and the three Fama-French factors. We then estimate excess comovement as the mean absolute correlation of residuals of univariate (OLS) or joint (FGLS) regressions of these fundamentals on industry returns. We show that excess unconditional comovement is surprisingly high (a lower bound of 0.134 and an upper bound of 0.357) and represents between 31 % and 83 % of the average raw absolute correlation. Excess comovement is also consistently significant across industries and over our entire sample interval. Furthermore, we findthatthedegreeofexcess comovement is symmetric, i.e., not significantly different in rising or falling markets. We explain approximately 21 % of this excess correlation by its positive relation to market volatility, and reveal a negative relation of its lower bound to the level of the short-term interest rate.

In 2012 all ECB publications feature a motif taken from the €50 banknote. NOTE: This Working Paper should not be reported as representing the views of the European Central Bank (ECB). The views expressed are those of the authors and do not necessarily refl ect those of the ECB. Acknowledgements We thank Philipp Hartmann for inspiring and supporting this project throughout all stages. Philipp also invented the indicator’s name and its abbreviation CISS (pronounced like “kiss”). We thank Tommy Kostka for excellent research assistance and for several good ideas which helped improving the CISS. Very helpful comments from Geert Bekaert, Wolfgang Lemke, Simone Manganelli and an anonymous referee are gratefully acknowledged. We finally thank participants at the Euro Area Business Cycle Network conference “Econometric Modelling of Macro-Financial Linkages ” in Florence and the 5th CSDA International Conference on Computational and Financial Econometrics in London for fruitful discussions and comments. However, the views expressed in this paper are those of the authors and do not necessarily reflect those of the European Central Bank, the Eurosystem or the Magyar Nemzeti Bank.