This paper identifies international trade linkages as important determinants of crosscountry stock return dynamics. In addition to positive linkages associated with direct trade between a pair of countries, we document a distinct effect of trade competition. The stock indices of countries that compete more intensely with the US in common export markets have lower correlations with the US stock index. Similar patterns are observed when the European Union is treated as the focal region. The results are robust to controlling for the effects of currency fluctuations. These findings have important implications for international portfolio allocation and risk management.

JEL classification: G11, G12, G15, F14
Keywords: Trade linkages, comovement, international stock returns, competition​