April 9, 2001Global Investments Equity Correlations and Globalization Prepared by: Marwan Cherri Carlos A. Farha Yuko Fujio Günther Maté Xu Wang

April 9, 2001Global Investments Globalization Has the world become more economically integrated? How can the effect be measured? What are the implications for investors?

April 9, 2001Global Investments Outline The Project Methodology Results: Industry Country Conclusions

April 9, 2001Global Investments 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

April 9, 2001Global Investments Methodology G7 Index from MSCI as common factor Country Indexes from MSCI as country factors Industry Indexes by Country from DS Change in Return from t-1 to t Individual Market Cap t-1 Total Market Cap t-1 X G7 Indexes per Industry Factors

April 9, 2001Global Investments Methodology Two-Step Regression Industry Return 1 = Global + Residual 1 = Country + Residual 2 Industry G7 Industry Returns on Common Factor Residuals on Cross-Country Indexes Cross-Correlation Among Individual G7 Industries Among Countries

April 9, 2001Global Investments Results Mean Excess Returns Industry Country

April 9, 2001Global Investments Industry Results Average G7 Industry Cross-Correlation

April 9, 2001Global Investments Industry Results Change in Correlation over time

April 9, 2001Global Investments Industry Results Cross-Correlation

April 9, 2001Global Investments Industry Results Two-Step Approach

April 9, 2001Global Investments 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

April 9, 2001Global Investments Country Results Absolute Country Factors

April 9, 2001Global Investments Country Results Jan 89 – Dec 92 Jan 93 – Dec 96 Jan 97 – Feb 01 Jan 89 – Dec 92 Jan 97 – Feb 01

April 9, 2001Global Investments Conclusions Industry factors Country Factors Differences in relative size of effect More pronounced for globally oriented industries Cross-country diversification US EU Asia