The Rise in Comovement across National Stock Markets: Market Integration or IT Bubble?

Robin Brooks and Marco Del Negro
Working Paper 2002-17a
September 2002

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A stylized fact in the portfolio diversification literature is that diversifying across countries is more effective than diversifying across industries in terms of risk reduction. But with the rise in comovement across national stock markets since the mid-1990s, this no longer appears to be true. We explore whether this change is driven by global integration and therefore likely to be permanent, or if it is a temporary phenomenon associated with the recent stock market bubble. Our results point to the latter hypothesis. In the aftermath of the bubble, diversifying across countries may therefore still be effective in reducing portfolio risk.

JEL classification: G11, G15

Keywords: diversification, risk, international financial markets, industrial structure

An earlier version of this paper circulated under the title “Country versus Industry Factors in Global Stock Returns.” The authors thank Stefano Cavaglia, John Griffin, Mark Kamstra, and Andrew Karolyi for helpful conversations, Ashoka Mody and Geert Rouwenhorst for extensive comments on earlier drafts, and Young Kim for excellent research assistance. The views expressed here are the authors’ and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors’ responsibility.

Please address questions regarding content to Robin Brooks, Financial Studies Division, Research Department, International Monetary Fund, 700 19th Street, N.W., Washington, D.C. 20431,, or Marco Del Negro, Research Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street, N.E., Atlanta, Georgia 30309-4470, 404-498-8561,