A stylized fact in the portfolio diversification literature is that diversifying across countries is more effective than diversifying across industries in terms of risk reduction. But with the rise in comovement across national stock markets since the mid-1990s, this no longer appears to be true. We explore whether this change is driven by global integration and therefore likely to be permanent, or if it is a temporary phenomenon associated with the recent stock market bubble. Our results point to the latter hypothesis. In the aftermath of the bubble, diversifying across countries may therefore still be effective in reducing portfolio risk.JEL classification: G11, G15

Gang Yi, and seminar and conference participants at the National Bureau of Economic Research, the IMF, and the Hong Kong University for very useful comments, and Heather Milkiewicz for research assistance. The views expressed are the authors' own, and do not represent those of the World Bank, the IMF, or their respective policies.The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.

The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the Th1F or J1v1F policy. Working Papers describe research in progress by the author( s) and are published to elicit comments and to further debate. WP/00/1S1This paper explores the global impact of population aging, using a calibrated overlapping generations model of eight world regions to simulate the effects of historical and projected demographic trends on international capital flows. The simulations show that there will be a turning point in regional savings -investment balances between 2010 and 2030 when the European Union and North America will experience a substantial decline in savings relative to investment as their populations age rapidly. This shift will be financed by capital flows from less developed regions which are projected to become capital exporters.

A stylized fact in the portfolio diversification literature is that diversifying across countries is more effective than diversifying across industries in terms of risk reduction. But with the rise in comovement across national stock markets since the mid-1990s, this no longer appears to be true. We explore whether this change is driven by global integration and therefore likely to be permanent, or if it is a temporary phenomenon associated with the recent stock market bubble. Our results point to the latter hypothesis. In the aftermath of the bubble, diversifying across countries may therefore still be effective in reducing portfolio risk.JEL classification: G11, G15

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