Robin Brooks and Marco Del Negro
Working Paper 2003-8
March 2003

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We explore the link between international stock market comovement and the degree to which firms operate globally. Using stock returns and balance sheet data for companies in twenty countries, we estimate a factor model that decomposes stock returns into global, country- and industry-specific shocks. We find a large and highly significant link: a firm raising its international sales by 10 percent raises the exposure of its stock return to global shocks by 2 percent and reduces its exposure to country-specific shocks by 1.5 percent. This link has grown stronger over time since the mid–1980s.

JEL classification: G11, G15

Keywords: diversification, risk, international financial markets, industrial structure

The paper was prepared for the IMF conference on “Global Linkages.” We thank our discussant, Kathryn Dominguez, and other participants for many helpful comments. We are also grateful to John Campbell, Stefano Cavaglia, Marcelle Chauvet, Kristin Forbes, Ashoka Mody, Geert Rouwenhorst, Dan Waggoner, participants in the 2003 AEA annual meetings session on “Global Linkages” and the Atlanta Fed Finance Brown Bag for their suggestions, Menzie Chinn for sharing his capital account liberalization measure with us, Iskander Karibzhanov for translating some of our code into C, and Young Kim for excellent research assistance. The views expressed here are the authors’ and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors’ responsibility.

Please address questions regarding content to Robin Brooks, Research Department, International Monetary Fund, 700 19th Street, N.W., Washington, D.C. 20431, 202-623-6236, 202-623-4740,, or Marco Del Negro, Research Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street, N.E., Atlanta, Georgia 30309-4470, 404-498-8561, 404-498-8956,