We use monthly stock market indices for 58 countries to construct pairwise correlations of returns and explain these correlations with differences in the industrial structure across these countries. We find that countries with similar industries have stock markets that exhibit high correlation of returns. The results are robust to the inclusion of other regressors like differences in income per capita, stock market capitalizations, measures of institutions, as well as various fixed time, country and country-pair effects. We also find that differences in the structure of exports explain stock market correlations quite well. Our results are consistent with models in which the impact of each industry-specific shock is proportional to the share of this industry in the overall industrial output of the country. We also show that differences in production structures have higher explanatory power for segmented markets rather than for markets that are integrated.

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