International Finance and Financial Policy

By Hans R. Stoll | Go to book overview

25
The Shape of World Equity Markets

HANS R. STOLL

Active global secondary markets have developed most rapidly in those financial instruments that are naturally international--currencies--or those that have limited risk--the debt of major governments. 1 Secondary markets for trading equities are still primarily national in character as the companies domiciled in a country are traded primarily on the stock market of that country. In this paper, the forces leading to greater globalization of equity markets are described and the benefits of international diversification are shown. Some of the techniques for investing internationally are discussed. Finally, alternative structural arrangements for world equity markets are contrasted, and the proposition put forward that in each time zone a dominant marketplace will arise for trading shares of companies domiciled outside that time zone.


FORCES OF CHANGE

Four factors have given rise to the globalization of financial markets. First, economic growth and political stability in other large industrialized nations have created important investment opportunities in those nations. The total capitalization of all the world's stock markets in 1972 was approximately $1.4 billion, with a U.S. share of 61 percent. By 1986, the total capitalization of all the world's stock markets amounted to approximately $5.6 billion, with the U.S. share shrinking to 39 percent. In this period, the most dramatic increase in capitalization occurred in Japan, with Japan's share of world market capitalization rising from 11 percent to 31 percent. 2 Foreign economies are sufficiently developed and foreign markets of sufficient size to accommodate much larger U.S. equity flows than have occurred to date.

Second, the institutionalization of savings in the hands of pension funds and

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