During the 1980s and 1990s, Changes in the S&P 500

Essay

During the 1980s and 1990s, changes in the S&P 500 (a broadly diversified index of U.S. stocks) were about 50 percent correlated with the MSCI EAFE Index (a broadly diversified index of European and other major industrialized countries stock markets). In recent years, the correlation has increased to more than 80 percent. Why? If an analyst wishes to calculate the cost of equity, which index should they use in estimating the equity risk premium?