Country world betas: The link between the stock market beta and macroeconomic beta

•A different approach to relating stock market comovements to macroeconomic linkages: world beta model.•Macroeconomic beta ≡ sensitivity of national output/inflation to world output/inflation.•Output betas account for 20-26% of variation in stock market betas. Inflation betas are insignificant.•World output volatility has marginal explanatory ability.•Output betas resemble firms' cash flow betas with respect to national output, similar to operating leverage.

We assess the connection between stock market linkages and macroeconomic linkages by using a world index model. Specifically, we test the association between the stock market beta (the sensitivity of country stock market index to world index) and macroeconomic betas (the sensitivity of national output and inflation to world output and inflation). Output betas account for about 20-26% of the cross-section of stock market betas. Controlling for previously-documented factors affecting stock market comovements: world output volatility is somewhat significant, while inflation betas, trade openness and world stock market volatility are insignificant in accounting for variation in stock market betas.