Globalization and International Financial Markets

We want to analyze the implications of linkages in trade networks for real goods for the properties of international equity markets. Using concepts from our own work on network-based asset pricing we compute trade linkages between countries at the goods level and use the resulting network structures as explanatory quantities in the analysis of international equity markets with respect to expected returns, volatilities, and correlations. The project is a natural next step in the research agenda laid out in SAFE projects like "Network Connectivity, Self-Exciting Jumps and General Equilibrium Asset Prices" and "General Equilibrium with Contagion Effects", where the goal was to understand the impact of connectedness on asset pricing quantities. The work in the current project will mostly be empirical at this stage, and the goal in the first stage of the project is to analyze the relation between the characteristics of a country's position in a trade network for certain goods and the return on its aggregate stock market. Depending on the performance of the empirical approach a natural extension would then be to the analysis of exchange rates.