Financial development and stock returns: A cross-country analysis

We examine stock returns in a cross section of emerging and mature markets (49 countries) over the period 1980-1999. Stock returns are found to be significantly related to the degree of financial development. In general, a deeper and higher quality banking system is associated with lower volatility of stock returns and a greater synchronization in the movements of domestic and world returns. International synchronization is also greater the more liquid the stock market.