For portfolio managers the question if the rise in synchronization across national equity markets is driven by fundamentals, and therefore likely to be permanent, or if it is linked to the recent stock market bubble, and therefore temporary, is critical. This is because portfolio managers have traditionally followed a top-down approach, first choosing countries in which to invest and then selecting the best securities in each market. This approach is consistent with the view that variation in international stock returns is due mainly to country effects, a view that was until recently validated by academic research. For example, Heston and Rouwenhorst (1994, 1995) show that country-specific sources.
