| Abstract: | This paper examines how shocks can transmit across international stock markets through the channel of time-varying investor risk preferences. We highlight the effects of this channel by comparing the conventional constant relative risk aversion utility function with the habit-formation utility function of Campbell and Cochrane (J. Pol. Econ. 107 (1999) 205). Calibrating our model with data from Argentina, Korea and Mexico, we find that in the presence of time-varying investor risk preferences, market integration generates a substantial increase in cross-country co-movements of stock returns. |
