Introduction

In this chapter, convergence and divergence of financial systems is addressed through the point of view of the investor. This study points out the difference between the international integration of financial markets which means an equalization of prices of risk and the correlation among them indicating that assets are affected by similar events. Each of these aspects follows his own path. Stock market correlation is measured since the middle of the nineteenth century to 2008. Tools offered by Modern Portfolio Theory are used to analyse incentives to diversify. To achieve a consistent result these tools require high-quality data. Indeed, even a slight default in the construction methodology of the data is magnified with time. High-quality data imply dividend series since dividends were the major source of return before 1914. Unfortunately, these kind of data are not easily available. Consequently, this study focuses only on markets with high quality data: France and the United States.

To be correlated, two markets first need to be integrated and that integration has to be measured. Such a study is made possible by the fact that West European savers invested a large part of their portfolio in foreign securities before 1914, although distance-related costs seemed to be stronger than today. The price of risk in US and French stocks is used to test the integration of these markets before the First World War. Since we observe an equal price of risk we cannot reject the hypothesis of financial integration. But this integration is characterized by a low level of stock market correlation.

This a priori contradiction is very consistent with exportation of capital: with an equal price of risk the incentive to buy foreign assets can only be low correlation. Optimal portfolio theory indicates a part of US stocks coherent with what was really observed for French savers. But it also shows that convergence is a multifaceted concept: whether one chooses to focus on market integration or on market correlation, this will lead to different conclusions. Thus, this paper aims at a more comprehensive approach to that question.