Hostname: page-component-78c5997874-8bhkd Total loading time: 0 Render date: 2024-11-15T10:30:54.279Z Has data issue: false hasContentIssue false
  • English
  • Français

Emerging Markets Are Catching Up: Economic or Financial Integration?

Published online by Cambridge University Press:  02 March 2020

Amir Akbari Open the ORCID record for Amir Akbari [Opens in a new window] ,
Lilian Ng Open the ORCID record for Lilian Ng [Opens in a new window]  and
Bruno Solnik Open the ORCID record for Bruno Solnik [Opens in a new window]
Amir Akbari
Affiliation:
Akbari, amir.akbari@uoit.ca, University of Ontario Institute of Technology
Lilian Ng*
Affiliation:
Ng, lng@schulich.yorku.ca, York University
Bruno Solnik
Affiliation:
Solnik, solnik@ust.hk, HEC Paris andHong Kong University of Science and Technology
*
Ng (corresponding author), lng@schulich.yorku.ca
Get access Rights & Permissions [Opens in a new window]

Abstract

We propose a simple metric to measure two aspects of market integration, namely, economic integration (defined as a common cash-flow dynamic) and financial integration (defined as a common risk-pricing dynamic) and then examine their evolution through time while controlling for volatility. We find that developed (DEV) countries exhibit greater degrees of financial and economic integration than emerging (EMG) markets. Although the financial integration gap between these markets remains large throughout the sample period, the EMG economies are catching up with their DEV counterparts in recent years; their level of economic integration has reached that of DEV countries.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 55 , Issue 7 , November 2020 , pp. 2270 - 2303
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2020

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

We thank Kee-Hong Bae, Alexander Barinov, Geert Bekaert, Long Chen, Ric Colacito, Zhi Da, Chuan-Yang Hwang, Zsuzsa Huszar, Andrew Karolyi, Jun Sik Kim, Sie Ting Lau, Yan Li, Qianqiu Liu, David Ng, Richard Roll, Konark Saxena, Michael Schill (the referee), Stephan Siegel, Rien Wagenvoort, Terry Walter, Qinghai Wang, Xiaoyan Zhang, and participants at the 2018 Asian Finance Association Meetings, the 2017 Conference of Asia-Pacific Financial Markets, the 2018 China International Conference in Finance, the 2018 Finance Down Under Conference, the 2018 Financial Management Association (FMA) Meetings, the 2018 FMA Asia/Pacific Conference, Hong Kong University of Science and Technology, and the University of Ontario Institute of Technology for many helpful comments and suggestions. We especially thank Eliza Wu and Bohui Zhang for providing an early motivation for our article. This article is a substantial revision of an earlier version entitled “Integrated Markets: Economic or Financial Integration?” We are grateful to the Asian Finance Association for the 2018 Best Paper Award.

References

Akbari, A.; Carrieri, F.; and Malkhozov, A.. “Can Cross-Border Funding Frictions Explain Financial Integration Reversals?” Working Paper, available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3033837 (2017).Google Scholar
Akbari, A., and Ng, L.. “International Market Integration: A Survey.” Asia-Pacific Journal of Financial Studies, forthcoming (2020).CrossRefGoogle Scholar
Ammer, J., and Mei, J.. “Measuring International Economic Linkages with Stock Market Data.” Journal of Finance, 51 (1996), 1743–1763.CrossRefGoogle Scholar
Baele, L., and Soriano, P.. “The Determinants of Increasing Equity Market Comovement: Economic or Financial Integration? ” Review of World Economics, 146 (2010), 573–589.CrossRefGoogle Scholar
Bekaert, G., and Harvey, C. R.. “Time-Varying World Market Integration.” Journal of Finance, 50 (1995), 403–444.CrossRefGoogle Scholar
Bekaert, G.; Harvey, C. R.; Kiguel, A.; and Wang, X. S.. “Globalization and Asset Returns.” Annual Review of Financial Economics, 8 (2016), 221–288.CrossRefGoogle Scholar
Bekaert, G.; Harvey, C. R.; Lundblad, C. T.; and Siegel, S.. “What Segments Equity Markets? ” Review of Financial Studies, 24 (2011), 3841–3890.CrossRefGoogle Scholar
Bekaert, G.; Harvey, C. R.; Lundblad, C. T.; and Siegel, S.. “The European Union, the Euro, and Equity Market Integration.” Journal of Financial Economics, 109 (2013), 583–603.CrossRefGoogle Scholar
Bekaert, G., and Mehl, A.. “On the Global Financial Market Integration ‘Swoosh’ and the Trilemma.” Working Paper No. w23124, National Bureau of Economic Research (2017).CrossRefGoogle Scholar
Bollerslev, T., and Wooldridge, J. M.. “Quasi-Maximum Likelihood Estimation and Inference in Dynamic Models with Time-Varying Covariances.” Econometric Reviews, 11 (1992), 143–172.CrossRefGoogle Scholar
Boyer, B.; Gibson, M.; and Loretan, M.. “Pitfalls in Tests for Changes in Correlations,” International Finance Discussion Paper, Board of Governors of the Federal Reserve System (1997).CrossRefGoogle Scholar
Campbell, J. Y.“A Variance Decomposition for Stock Returns.” Economic Journal, 101 (1991), 157–179.CrossRefGoogle Scholar
Campbell, J. Y.“Understanding Risk and Return.” Journal of Political Economy, 104 (1996), 298–345.CrossRefGoogle Scholar
Campbell, J. Y., and Shiller, R. J.. “The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors.” Review of Financial Studies, 1 (1988), 195–228.CrossRefGoogle Scholar
Carrieri, F.; Errunza, V.; and Hogan, K.. “Characterizing World Market Integration through Time.” Journal of Financial and Quantitative Analysis, 42 (2007), 915–940.CrossRefGoogle Scholar
Chen, L.; Da, Z.; and Zhao, X.. “What Drives Stock Price Movements? ” Review of Financial Studies, 26 (2013), 841–876.CrossRefGoogle Scholar
Chen, L., and Zhao, X.. “Return Decomposition.” Review of Financial Studies, 22 (2009), 5213–5249.CrossRefGoogle Scholar
Cochrane, J. H.Asset Pricing: Revised Edition. Princeton, NJ: Princeton University Press (2005).Google Scholar
Cochrane, J. H.“Presidential Address: Discount Rates.” Journal of Finance, 66 (2011), 1047–1108.CrossRefGoogle Scholar
Dumas, B.; Harvey, C. R.; and Ruiz, P.. “Are Correlations of Stock Returns Justified by Subsequent Changes in National Outputs? ” Journal of International Money and Finance, 22 (2003), 777–811.CrossRefGoogle Scholar
Eiling, E., and Gerard, B.. “Emerging Equity Market Comovements: Trends and Macroeconomic Fundamentals.” Review of Finance, 19 (2015), 1543–1585.CrossRefGoogle Scholar
Engle, R.“Dynamic Conditional Correlation: A Simple Class of Multivariate Generalized Autoregressive Conditional Heteroskedasticity Models.” Journal of Business & Economic Statistics, 20 (2002), 339–350.CrossRefGoogle Scholar
Errunza, V., and Losq, E.. “International Asset Pricing under Mild Segmentation: Theory and Test.” Journal of Finance, 40 (1985), 105–124.CrossRefGoogle Scholar
Forbes, K. J., and Rigobon, R.. “No Contagion, Only Interdependence: Measuring Stock Market Comovements.” Journal of Finance, 57 (2002), 2223–2261.CrossRefGoogle Scholar
Guay, W.; Kothari, S.; and Shu, S.. “Properties of Implied Cost of Capital Using Analysts’ Forecasts.” Australian Journal of Management, 36 (2011), 125–149.CrossRefGoogle Scholar
Hail, L., and Leuz, C.. “International Differences in the Cost of Equity Capital: Do Legal Institutions and Securities Regulation Matter? ” Journal of Accounting Research, 44 (2006), 485–531.CrossRefGoogle Scholar
Hardouvelis, G.; Malliaropulos, D.; and Priestley, R.. “EMU and European Stock Market Integration.” Journal of Business, 79 (2006), 365–392.CrossRefGoogle Scholar
Hou, K.; Karolyi, G. A.; and Kho, B.-C.. “What Factors Drive Global Stock Returns? ” Review of Financial Studies, 24 (2011), 2527–2574.CrossRefGoogle Scholar
Ince, O. S., and Porter, R. B.. “Individual Equity Return Data from Thomson Datastream: Handle with Care! ” Journal of Financial Research, 29 (2006), 463–479.CrossRefGoogle Scholar
Kalemli-Ozcan, S.; Sørensen, B. E.; and Yosha, O.. “Economic Integration, Industrial Specialization, and the Asymmetry of Macroeconomic Fluctuations.” Journal of International Economics, 55 (2001), 107–137.CrossRefGoogle Scholar
Karolyi, G. A.; Lee, K.-H.; and Dijk, M. A. van. “Understanding Commonality in Liquidity around the World.” Journal of Financial Economics, 105 (2012), 82–112.CrossRefGoogle Scholar
König, J., and Ohr, R.. “Different Efforts in European Economic Integration: Implications of the EU Index.” Journal of Common Market Studies, 51 (2013), 1074–1090.CrossRefGoogle Scholar
Lau, S. T.; Ng, L.; and Zhang, B.. “Information Environment and Equity Risk Premium Volatility around the World.” Management Science, 58 (2012), 1322–1340.CrossRefGoogle Scholar
Lehkonen, H.“Stock Market Integration and the Global Financial Crisis.” Review of Finance, 19 (2014), 2039–2094.CrossRefGoogle Scholar
Li, Y.; Ng, D. T.; and Swaminathan, B.. “Predicting Market Returns Using Aggregate Implied Cost of Capital.” Journal of Financial Economics, 110 (2013), 419–436.CrossRefGoogle Scholar
Longin, F., and Solnik, B.. “Extreme Correlation of International Equity Markets.” Journal of Finance, 56 (2001), 649–676.CrossRefGoogle Scholar
Nowotny, E.; Mooslechner, P.; and Ritzberger-Grunwald, D.. The Integration of European Labour Markets. Cheltenham, UK: Edward Elgar Publishing (2009).CrossRefGoogle Scholar
Ohashi, K., and Okimoto, T.. “Increasing Trends in the Excess Comovement of Commodity Prices.” Journal of Commodity Markets, 1 (2016), 48–64.CrossRefGoogle Scholar
Pasquariello, P.“Financial Market Dislocations.” Review of Financial Studies, 27 (2014), 1868–1914.CrossRefGoogle Scholar
Pástor, v; Sinha, M.; and Swaminathan, B.. “Estimating the Intertemporal Risk–Return Tradeoff Using the Implied Cost of Capital.” Journal of Finance, 63 (2008), 2859–2897.CrossRefGoogle Scholar
Phylaktis, K., and Ravazzolo, F.. “Measuring Financial and Economic Integration with Equity Prices in Emerging Markets.” Journal of International Money and Finance, 21 (2002), 879–903.CrossRefGoogle Scholar
Pukthuanthong, K., and Roll, R.. “Global Market Integration: An Alternative Measure and Its Application.” Journal of Financial Economics, 94 (2009), 214–232.CrossRefGoogle Scholar
Solnik, B. H.“An Equilibrium Model of the International Capital Market.” Journal of Economic Theory, 8 (1974), 500–524.CrossRefGoogle Scholar
Stulz, R.“A Model of International Asset Pricing.” Journal of Financial Economics, 9 (1981), 383–406.CrossRefGoogle Scholar