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Review of Finance Advance Access published online on August 13, 2008
Review of Finance, doi:10.1093/rof/rfn020
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The Author 2008. Published by Oxford University Press on behalf of the European Finance Association. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org

Economic News and International Stock Market Co-movement*

Rui Albuquerque1 and Clara Vega2

1 Boston University School of Management and CEPR
2 Board of Governors of the Federal Reserve System and William E. Simon School of Management

We analyze the effects that real-time domestic and foreign news about fundamentals have on the co-movement between stock returns of a small, open economy, Portugal, and a large economy, the United States. Consistent with our theoretical model, we find that US macroeconomic news and Portuguese earnings news do not affect stock market co-movement, whereas Portuguese macroeconomic news lowers stock market co-movement. We find that US news affects Portuguese stock market returns, though less so when US stock market returns are included in the regression. We provide evidence, contrary to common wisdom, that this last result does not derive from contagion.

JEL Classification: F3, G12, G14, G15

* We thank an anonymous referee, Alberto Castro, Mark Carey, João Duque, Bernard Dumas, Mark Flannery, Joe Gagnon, Graciela Kaminsky, Yrjo Koskinen, Mico Loretan, José Mata, Andy Navajo, M. Nimalendra, Jon Wongswan, and seminar participants at the Bank of Portugal, the 2006 European Finance Association Meetings in Zurich, Federal Reserve Board, Boston University, ISEG, George Washington University, Rice University, University of Illinois, University of Florida, and University of Georgia for comments. We thank Marcus C. Newman for his research assistance, António Antunes for providing us the Portuguese stock market data, José Mata for providing us the macroeconomic news release schedules and the Banco de Portugal for providing funding for this research. The views presented in this paper are solely those of the authors and do not represent those of the Federal Reserve Board or its staff, or those of the Banco de Portugal. This paper was previously circulated with the following title, "Asymmetric Information in the Stock Market: Economic News and Co-movement."


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