april 9, 2001global investments equity correlations and globalization prepared by: marwan cherri...

April 9, 2001 Global Investments

Equity Correlations and Globalization

Prepared by:

Marwan Cherri

Carlos A. Farha

Yuko Fujio

Günther Maté

Xu Wang


Globalization

• Has the world become more economically integrated?

• How can the effect be measured?

• What are the implications for investors?


Outline

•The Project

•Methodology

•Results:•Industry•Country

•Conclusions


The Project

G7 Countries

8 Industries

interaction

Factors that drive stock returns

Integration among countries

Integration among industries

Measurements of correlations and shocks

Analysis

Investigate


Methodology

G7 Index from MSCI as common factor

Country Indexes from MSCI as country factors

Industry Indexes by Country from DS

Change in Returnfrom t-1 to t

Individual Market Cap t-1Total Market Cap t-1X

G7 Indexes per Industry

Factors


Methodology

Two-Step RegressionIndustry

Return 1 = Global + Residual 1

Residual 1 = Country + Residual 2

Industry

G7 Industry Returns on Common Factor

Residuals on Cross-Country Indexes

Cross-CorrelationAmong Individual G7 Industries

Among Countries


Results

Mean Excess Returns

Industry

Country

Excess Returns(expressed in % per month) Mean s

IndustryPharmaceuticals 0.817 4.447Retail 0.500 4.799Resources 0.308 4.467Financials 0.073 5.019Chemicals -0.074 4.546Utilities -0.150 3.760Engineering -0.164 5.467Transport -0.405 5.053

Avg. Absolute Value 0.312 4.695

CountryUSA 0.651 3.773France 0.503 5.166Germany 0.497 5.725United Kingdom 0.297 4.799Italy 0.216 7.280Canada 0.213 5.160Japan -0.582 7.185


Excess Returns(expressed in % per month) Mean s

IndustryPharmaceuticals 0.817 4.447Retail 0.500 4.799Resources 0.308 4.467Financials 0.073 5.019Chemicals -0.074 4.546Utilities -0.150 3.760Engineering -0.164 5.467Transport -0.405 5.053


CountryUSA 0.651 3.773France 0.503 5.166Germany 0.497 5.725United Kingdom 0.297 4.799Italy 0.216 7.280Canada 0.213 5.160Japan -0.582 7.185



Industry ResultsAverage G7 Industry Cross-Correlation

0.0 0.1 0.2 0.3 0.4

Utilities

Pharmaceuticals

Transportation

Retail

Chemical

Engineering

Resources

Financials


Industry ResultsChange in Correlation over time

-50% 0% 50% 100% 150% 200%

Utilities

Pharmaceuticals

Transportation

Retail

Chemical

Engineering

Resources

Financials

Change from Jan89 to Mar96

Apr96 to Mar01


Industry ResultsCross-Correlation

Utilities

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

Jan98 toMay91

Jun91 toOct93

Nov93 toMar96

Apr96 toAug98

Sep98 toMar01

Pharmaceuticals

0.00

0.05

0.10

0.15

0.20

0.25

0.30

Jan98 toMay91

Jun91 toOct93

Nov93 toMar96

Apr96 toAug98

Sep98 toMar01

Chemical

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

Jan98 toMay91

Jun91 toOct93

Nov93 toMar96

Apr96 toAug98

Sep98 toMar01

Engineering

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

Jan98 toMay91

Jun91 toOct93

Nov93 toMar96

Apr96 toAug98

Sep98 toMar01

Resources

0.000.050.100.150.200.250.300.350.400.450.500.550.60

Jan98 toMay91

Jun91 toOct93

Nov93 toMar96

Apr96 toAug98

Sep98 toMar01

Financials

0.000.050.100.150.200.250.300.350.400.450.500.550.60

Jan98 toMay91

Jun91 toOct93

Nov93 toMar96

Apr96 toAug98

Sep98 toMar01


Industry ResultsTwo-Step Approach

Absolute Industry Factor Chemicals

0%1%1%

2%2%3%3%4%

4%5%5%

Jan-89 toMay-91

Jun-91 toOct-93

Nov-93 toMar-96

Apr-96 toAug98

Sep-98 toMar01

Absolute Industry Factor Engineering

0%

1%

2%

3%

4%

5%

6%

Jan-89 toMay-91

Jun-91 toOct-93

Nov-93 toMar-96

Apr-96 toAug98

Sep-98 toMar01

Absolute Industry Factor Pharmaceuticals

0%1%

1%2%

2%3%3%

4%4%

5%5%

Jan-89 toMay-91

Jun-91 toOct-93

Nov-93 toMar-96

Apr-96 toAug98

Sep-98 toMar01

Absolute Industry Factor Resources

0%

1%

2%

3%

4%

5%

6%

Jan-89 toMay-91

Jun-91 toOct-93

Nov-93 toMar-96

Apr-96 toAug98

Sep-98 toMar01

Absolute Industry Factor Financials

0%

1%

2%

3%

4%

5%

6%

Jan-89 toMay-91

Jun-91 toOct-93

Nov-93 toMar-96

Apr-96 toAug98

Sep-98 toMar01

Absolute Industry Factor Utilities

0%

1%

1%

2%

2%

3%

3%

4%

4%

5%

Jan-89 toMay-91

Jun-91 toOct-93

Nov-93 toMar-96

Apr-96 toAug98

Sep-98 toMar01


Results

Jan 89 to Mar 96

Correlation declined

• Changing world order• Emerging markets• Timing of recessions

April 1996 – to date

Correlation increased

• Consolidation• Global competition• Technological changes

Standardized Index Values

-

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

87 88 89 90 91 92 93 94 95 96 97 98 99 00

MSCI G7 Total USD

MSCI Emering Markets Total USD


Country ResultsAbsolute Country Factors

0.0% 1.0% 2.0% 3.0% 4.0% 5.0%

USA

UK

FRA

CAN

GER

JAP

ITA


Country Results

Jan 89 – Dec 92Jan 93 – Dec 96

Jan 93 – Dec 96Jan 97 – Feb 01

Jan 89 – Dec 92Jan 97 – Feb 01

Change from Jan89-Dec92 to Jan93-Dec96G7 JAP ITA GER FRA CAN UK USA

G7 0.00 (0.10) (0.13) (0.32) (0.05) 0.03 (0.13) (0.12)JAP 0.00 0.00 (0.35) (0.16) (0.00) (0.24) (0.20)ITA 0.00 (0.34) (0.22) (0.40) (0.17) (0.34)GER 0.00 (0.28) (0.18) (0.24) (0.11)FRA 0.00 0.13 0.01 0.01CAN 0.00 (0.13) (0.06)UK 0.00 (0.10)USA 0.00

Change from Jan93-Dec96 to Jan97-Feb01G7 JAP ITA GER FRA CAN UK USA

G7 0.00 (0.13) 0.16 0.45 0.08 0.28 0.17 0.33JAP 0.00 (0.17) 0.35 0.08 0.31 0.24 0.52ITA 0.00 0.29 0.35 0.53 0.14 0.46GER 0.00 0.31 0.51 0.23 0.44FRA 0.00 0.30 (0.04) 0.26CAN 0.00 0.30 0.17UK 0.00 0.39USA 0.00

Change from Jan89-Dec92 to Jan97-Feb01G7 JAP ITA GER FRA CAN UK USA

G7 0.00 (0.22) 0.04 0.13 0.03 0.31 0.04 0.21JAP 0.00 (0.17) 0.00 (0.07) 0.31 0.00 0.31ITA 0.00 (0.05) 0.13 0.13 (0.03) 0.13GER 0.00 0.03 0.33 (0.01) 0.34FRA 0.00 0.43 (0.03) 0.27CAN 0.00 0.17 0.11UK 0.00 0.29USA 0.00


Conclusions

• Industry factors

• Country Factors

• Differences in relative size of effect

• More pronounced for globally oriented industries

• Cross-country diversification US EU Asia

april 9, 2001global investments equity correlations and globalization prepared by: marwan cherri...

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