SINCE THE BEGINNING of 1986, the major stock markets have become increasingly internationalized by deregulation. By 1987 some 600 foreign stocks traded in the New York market, and the markets in London, Frankfurt, and Tokyo had also attracted numerous foreign listings. Some analysts worried that the growing international integration of financial markets could help transfer national financial disturbances to other markets.' The spectacle, in October of 1987, of nearly simultaneous price collapses around the world was evidence to the point. In this paper we analyze the daily movements in the stock price indexes, from close to close, of the United States, Japan, Great Britain, and Germany during 1986-88, focusing particularly on the correlation of price movements in these, the world's four largest equity markets. We begin by assuming that stock markets anticipate successfully most events that bear on dividends and discount rates, and that changes in stock prices will be related only to unanticipated events. Dealing with daily changes in asset prices and yields assures this, because more than a normal return can never be expected in efficient markets on financial assets, such as foreign deposits or bundles of shares, or on storable We wish to express admiration and gratitude to the several individuals in New York, Washington, London, and Frankfurt who selflessly contributed data and expert advice to this study while wishing to remain anonymous. 1. See Watson and others (1988, p. 45); Bank for International Settlements (1988, pp. 96-97). For recent evaluations of regulatory reform proposals, see Shiller (1988); Perry (1988); Kane (1988).

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Matter i n t he Aggregate? DOES CHARTING the course of q-the ratio of the market value of firms to the replacement cost of their assets-help in predicting investment by nonfinancial corporations? This study seeks to answer this question. In the process, it also analyzes the behavior of the after-tax rate of return on capital and the lag from new orders for capital goods to shipments to obtain consistent specifications and to check on the compatibility of results. Special attention is paid to the construction and interpretation of q and how it functions in concert with nonfinancial variables in the orders and investment equations. Balance-sheet variables and stock-market appraisals obviously affect the cost of capital of individual firms as well as their willingness and ability to invest. But their influence on aggregate investment behavior is less clear. In fact, studies conducted up to the mid-sixties generally found that debt-equity ratios or debt-capacity problems had little discernible effect Note: I am indebted to

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