Equity prices and financial globalization

- We study how real and financial shocks drive international equity returns.
- Trade integration increases the negative responses to oil price increases.
- Financial integration increases the negative responses to Fed funds rate increases.
- Cross-country regressions, VAR, and a simple asset pricing model support the findings.

This paper examines the association between equity returns, economic shocks, and economic integration. The empirical findings show that oil prices and U.S. Federal Reserve funds rates are associated with negative responses of international equity returns, of which a simple asset-pricing model is capable of explaining the international differences. Using vector autoregressions, we find that the effects of global economic shocks operate through the current excess returns of equity prices. Empirically, trade integration increases the responses of international equity returns to oil prices, while finance integration increases the responses of equity returns to Federal Reserve funds rates across countries.