In light of rapidly increasing foreign equity liability positions of emerging market economies, we test for a necessary condition of international risk sharing, namely for systematic patterns between idiosyncratic output fluctuations and financial market developments. Panel analysis of 22 emerging market economies shows strong evidence for pro‐cyclicality of capital gains on domestic stock markets both over short‐term and medium‐term horizons. This implies that domestic output fluctuations can be hedged through cross‐border ownership of financial markets. Copyright © 2012 John Wiley & Sons, Ltd.