Industrial Structure and the Comparative Behavior of International Stock Market Indices



    Search for more papers by this author
    • Allstate Professor of Finance, University of California, Los Angeles, Anderson Graduate School of Management, Los Angeles, CA 90024. Many thanks to Duke Bristow, Eugene Fama, Mark Grinblatt, Ivan P'ng, Walter Torous, Andrew Turner, Bill Ziemba, and especially to Armen Alchian and René Stulz for comments and constructive advice and to participants in workshops at Georgetown University, the Mid–America Institute for Public Policy Research, Notre Dame University, the University of Pennsylvania, the University of California, Los Angeles, and the Universidad de Chile for helpful suggestions.


Stock Price Indices are compared across countries in an attempt to explain why they exhibit such disparate behavior. Three separate explanatory influences are empirically documented. First, part of the behavior can be attributed to a technical aspect of index construction; some indices are more diversified than others. Second, each country's industrial structure plays a major role in explaining stock price behavior. Third, for the majority of countries, a portion of national equity index behavior can be ascribed to exchange rate behavior. Exchange rates explain a significant portion of common currency denominated national index returns, although the amount explained by exchange rates is less than the amount explained by industrial structure for most countries.