Financial market architecture and long-run equity market co-movement: Structural evidence from the G20

International equity markets exhibit persistent but uneven patterns of return co-movement, raising important questions about the structural determinants of global financial integration. While prior research links financial development and openness to increased synchronisation, it typically assumes a uniform relationship across markets. This study examines whether financial market functionality conditions equilibrium co-movement in a regime-dependent manner. Using the IMF Financial Market Index (FMI), capturing market depth, access, and efficiency, and a scaled dynamic correlation index constructed for G20 equity markets over 1996–2021, we estimate a panel framework that accounts for global shocks and macro-financial controls. The results show that financial market functionality is economically material; however, its effect is not uniform. A one standard deviation increase in FMI is associated with an increase of approximately five percentage points in long-run return correlation, implying a measurable reduction in international diversification benefits. Crucially, this relationship exhibits strong heterogeneity across development regimes. Regime-specific marginal effects show that the FMI effect is positive in the lowest development quartile, negative in the second quartile, strongest and statistically significant in the third quartile, and close to zero in the highest quartile. This non-monotonic pattern indicates that financial functionality does not simply intensify integration as markets become more developed. Rather, it shapes equilibrium synchronisation unevenly across development regimes. By contrast, efficiency in isolation produces economically smaller and less consistent effects. These findings contribute by moving beyond linear integration frameworks and demonstrating that financial market architecture operates as a conditional structural determinant of co-movement, rather than a uniform driver of global synchronisation. The results help reconcile mixed empirical evidence in the integration literature and highlight a trade-off between domestic financial development and cross-border portfolio independence.