Stock Market Valuation and Globalization

We study the valuation of similar assets in different national markets and how the valuation differentials have evolved through time. We focus on the impact of globalization and propose a (model free) measure of the degree of segmentation of world equity markets. We characterize which factors determine its cross-sectional and time series variation. Our first goal is to link the measure to the de jure globalization process using measures of capital and equity market restrictions on foreigners and trade liberalization. We then consider other local fundamental factors including financial development, political risk, regulatory and labor market frictions, and push factors such as U.S. interest rate conditions. We also examine actual valuation differentials (with special emphasis on the emerging market discount) and their determinants, and characterize which industries appear the least and most integrated into global capital markets.