Cross country stock market comovement: A macro perspective

•We document increases in both stock market synchronization and FDI and show that association survives controlling for other factors, at both country and firm level.•We provide a model that illustrates the mechanism, in a two-country asset pricing model with multinational firms and country-specific TFP shocks.•Increased FDI can explain about 30% of the increase in stock markets synchronisation.•Stock market increased comovement is due to a direct effect of increased FDI, over and above an increased comovement due to general business cycle synchronisation.