I explore the determinants of comovements between the U.S. and U.K.
stock markets from an asset pricing perspective. I use a present-value model
that captures the impact of time variation in both discount rates and market
expectations about future cash °ows embedded in stock prices. I de¯ne ¯nancial
integration as the cross-country correlation in discount rate shocks and real
integration as the corresponding correlation in dividend growth shocks. I ¯nd
that real integration is a major determinant of stock price comovements, and
it accounts for nearly 53% of the run-up in return correlation between the two
countries during the last two decades. This result is consistent with the increase
in the correlation of various indicators of economic activity during the same
period. The relative importance of real integration is lower for domestic ¯rms
which operate just within the U.S. This evidence suggests that real integration
is driven by those ¯rms whose assets are more exposed to global shocks.