If this were not the case, there would be no benefit from opening the market. However, factors that affect the risk premium on stocks now affect the stocks in the newly opened market. As a result, the return on equity in that market is likely to be more correlated than before with the return on equity in the rest of the world. I have found some evidence of such an increase.11 Further, when Karolyi and I12 examine the determinants of the correlation between U.S. stocks and Japanese stocks, we show that the U.S. market and the Japanese market move more closely together when volatility in either market is high. Though the evidence just described relates to the rational links between markets that result from the removal of barriers to international investment, there has also been much concern about the existence of links that are attributable to panic and confusion of foreign investors.
Globalization makes markets move together more than they did before.
This has led some to believe that the focus of equity analysis should be on industries across frontiers rather than on countries. Some investment management firms are now reorganizing, so that instead of having analysts whose work stops at the border of a country, they have analysts who look at an industry across countries. This raises the question of whether globalization has gone so far that we can ignore countries. Both Karolyi and I14 and John M. Griffin and I15 find that we cannot. Industry effects are of surprisingly little importance in explaining the correlation of stock returns across countries, we find.