Global Growth Opportunities and Market Integration






    Search for more papers by this author
    • Bekaert is at Columbia University and NBER; Harvey is at Duke University and NBER; Lundblad is at the University of North Carolina; Siegel is at the University of Washington. We appreciate the helpful comments of José Campa, Rajesh Chakrabarti, Will Goetzmann, John Graham, Anna Pavlova, Anna Scherbina, Andy Siegel, Jeff Wurgler, and seminar participants at the 2004 EFA meetings in Maastricht, the October 2004 Financial Market Integration lecture series at the ECB in Frankfurt, the 10th Annual Global Investment Conference in Whistler, the 11th Assurant/Georgia Tech Conference on International Finance, the 2005 WFA meetings in Portland, the 2005 Globalization and Financial Services JBF/World Bank Conference, the China International Conference in Finance, the Sixth CIFRA International Conference on Financial Development and Governance in Moscow, the Emerging Markets: Present Issues and Future Challenges Conference at the Universidad de Navarra (Oct. 2005), the University of North Carolina, the 2005 Pacific Northwest Finance Conference, Harvard University, the World Bank, the University of Antwerp and the University of Wisconsin. We are especially grateful for the comments of the referee and the Editor, Rob Stambaugh.


We propose an exogenous measure of a country's growth opportunities by interacting the country's local industry mix with global price to earnings (PE) ratios. We find that these exogenous growth opportunities predict future changes in real GDP and investment in a large panel of countries. This relation is strongest in countries that have liberalized their capital accounts, equity markets, and banking systems. We also find that financial development, external finance dependence, and investor protection measures are much less important in aligning growth opportunities with growth than is capital market openness. Finally, we formulate new tests of market integration and segmentation by linking local and global PE ratios to relative economic growth.