1. Introduction
Stock returns re#ect new market-level and "rm-level information. As Roll
(1988) makes clear, the extent to which stocks move together depends on the
relative amounts of "rm-level and market-level information capitalized into
stock prices. We "nd that stock prices in economies with high per capita gross
domestic product (GDP) move in a relatively unsynchronized manner. In
contrast, stock prices in low per capita GDP economies tend to move up or
down together. A time series of stock price synchronicity for the U.S. market
also shows that the degree of co-movement in U.S. stock prices has declined,
more or less steadily, during the 20th century. These "ndings are not due to
di!erences in market size or economy size.1
We consider three plausible explanations for our "nding. First, "rms in
low-income countries might have more correlated fundamentals, and this correlation
might make their stock prices move more synchronously. For example,
if low-income economies tend to be undiversi"ed, "rm-level earnings may be
highly correlated because industry events are essentially market-wide events.
Second, low-income economies often provide poor and uncertain protection of
private property rights. Political events and rumors in such countries could, by
themselves, cause market-wide stock price swings. Moreover, inadequate protection
for property rights could make informed risk arbitrage in their stock
markets unattractive. According to De Long et al. (1989, 1990), a reduction in
informed trading can increase market-wide noise trader risk, which we would
observe as increased market-wide stock price variation unrelated to fundamentals.
Third, in countries that provide poorer protection for public investors