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Li Qiu '09 Examining Stock Market Integration

By David Foster '10
Posted August 16, 2008
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If the housing market is all about location, the stock market is all about diversification. Any financial adviser worth his salt will tell you that a diversified portfolio is an essential part of a responsible investment strategy. So with the recession and the credit crunch, how can a good investor find a hedge against risk? For some, the solution is to place money in international securities. That way, if the Brazilian economy collapses, you can still rely on your Bolivian securities.

To understand the economic theory behind this strategy, Li Qiu is spending his summer studying the correlation among 20 different world markets. Examining the period 2001-2008, Qiu calculates the mean returns of all 20 markets weighed by market capitalization to come up with an overall mean return for each month. Then he calculates each market's deviation from that mean.

Economic literature acknowledges that there is indeed a correlation among markets, so rather than looking at the degree of correlation, Qiu is examining the factors that cause it. He is currently sorting through a formidable laundry list of variables including inflation, percentage of people speaking English, secondary school enrollment rates, and a few proxies for market openness such as foreign direct investment, amount of exports as a percentage of GDP, and government expenditure.

Qiu's inspiration to pursue this project was an article he read that suggested that asian economies were decoupling from the United States markets. Although the subprime crisis and the persistent war in Iraq have put a damper on the U.S. economy, many asian economies such as China are growing at an amazing pace. Working with former Fed economist and Economics Professor Ann Owen, Qiu says that he expects to learn a lot by pursuing his Levitt Center-funded project, even if he does not completely understand all of the econometric models.

A well-rounded student with a variety of extracurricular activities, including serving as ISA president, tutoring in the Q.Lit Center, and playing percussion in the orchestra, Qiu hopes to apply his greater understanding of world markets in finance, portfolio management, asset management, or research. Of course, he has a backup plan: "If the market stays poor, I have considered getting a Ph.D."

-- by David Foster '10

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