WHY DO MARKETS MOVE TOGETHER - AN INVESTIGATION OF US-JAPAN STOCK RETURN COMOVEMENTS

This article explores the fundamental factors that affect cross-countr y stock return correlations. Using transactions data from 1988 to 1992 , we construct overnight and intraday returns for a portfolio of Japan ese stocks using their NYSE-traded American Depository Receipts (ADRs) and a matched-sample portfolio of U.S. stocks. We find that U. S. mac roeconomic announcements, shocks to the Yen/Dollar foreign exchange ra te and Treasury bill returns, and industry effects have no measurable influence on U.S. and Japanese return correlations. However, large sho cks to broad-based market indices (Nikkei Stock Average and Standard a nd Poor's 500 Stock Index) positively impact both the magnitude and pe rsistence of the return correlations.