Is the International Diversification Potential Diminishing? Foreign Equity Inside and Outside the US

International capital markets have become more integrated over the past twenty years. In this paper, I ask what this integration and its resulting higher correlation would imply about international diversification potential using returns from foreign market indices and foreign stocks that are listed and traded in the US. I extend the break-date estimation approach of Bai and Perron (1998) to consider potentially changing covariances over time. I find that the covariances among country stock markets have increased only slightly while the foreign stocks in the US markets have become significantly more correlated with the US market.