Why do you think the empirical studies regarding factors affecting equity returns mainly showed which domestic factors were more significant than international factors, and, secondly, that industrial membership of firm was of little importance in forecasting the international correlation structure of a set of international stocks?
Whilst national security markets have become more integrated in recent years, there is yet a tremendous amount of segmentation which brings about the benefit to be derived from international diversification of financial assets. Monetary & fiscal policies differ among countries due to different economic circumstances. The economic policies of a country affect directly the securities traded in the country, and they will act differently than securities traded in another country along with other economic policies being implemented. Therefore, it is not surprising that domestic factors are found to be more significant than international factors in affecting security returns. Likewise, industrial activity in a country is also influenced by the economic policies of the country; therefore firms in the similar industry group, but from different countries, will not of necessity behave the similar in all countries, nor should we expect the securities issued by these firms to act alike.