Cross country stock market comovement: A macro perspective

Since the 1990s, there has been a simultaneous rise in cross-country stock market correlations and FDI positions. We establish an empirical relationship between these two, for pairs of developed economies that survives controlling for relevant factors. At firm level, we find that stock returns of multinationals that invest in technology capital are more correlated with world stock markets. Using a calibrated two-country asset pricing model with multinationals, we find that the increase in FDI accounts for one third of the rise in the observed stock market correlations. When allowing for increases in trade and portfolio diversification, we find that these two factors do not generate an increase in stock market correlations.