Determinants of equity returns correlations

Abstract

This study aims to identify the determinants of common stock returns movements.
We computed the conditional stock returns correlations for a sample of 11 countries
over the period 2005–2014. One-month correlations were calculated using the ADCCGARCH model to allow them to be time-varying and to consider the asymmetry and
heteroscedasticity characterizing the returns time series. Based on regression and
PCA analysis, our results show that country governance, macroeconomic, and financial variables have a significant effect on stock returns correlations. We highlight
the fact that conditional correlations between stock returns are impacted by the
following conditions: (1) improvement of the current account balance, (2) decrease
in the gross domestic product growth rate, (3) increase in the inflation rate, (4)
increase in credit spreads, and (5) deterioration of stock returns.