Hostname: page-component-78c5997874-m6dg7 Total loading time: 0 Render date: 2024-11-15T01:51:34.121Z Has data issue: false hasContentIssue false
  • English
  • Français

Characterizing World Market Integration through Time

Published online by Cambridge University Press:  06 April 2009

Francesca Carrieri ,
Vihang Errunza  and
Ked Hogan
Get access Rights & Permissions [Opens in a new window]

Abstract

International asset pricing models suggest that barriers to portfolio flows and availability of market substitutes affect the degree and time variation of world market integration. We use GARCH-in-mean methodology to assess the evolution in market integration for eight emerging markets over the period 1977–2000. Our results suggest that while local risk is still a relevant factor in explaining time variation of emerging market returns, none of the countries appear to be completely segmented. We find that there are substantial crossmarket differences in the degree of integration. The evolution toward more integrated financial markets is apparent although at times we do observe reversals. In addition, we provide clear evidence on the impropriety of directly using correlations of market-wide index returns as a measure of market integration. Finally, financial market development and financial liberalization policies play important roles in integrating emerging markets.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 42 , Issue 4 , December 2007 , pp. 915 - 940
Copyright
Copyright © School of Business Administration, University of Washington 2007

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.)

References

Baba, Y.; Engle, R.; Kraft, D.; and Kroner, K.. “Multivariate Simultaneous Generalized ARCH.” Discussion Paper No. 89–57, University of California San Diego (1989).Google Scholar
H, Bae K.. “Time Variation in the Price of Risk and the International Capital Market Structure.” Ph.D. Diss., Ohio State University (1993).Google Scholar
Baele, L. “Volatility Spillover Effects in European Equity Markets.” Journal of Financial and Quantitative Analysis, 40 (2005), 373–401.CrossRefGoogle Scholar
Bailey, W., and Jagtiani, J.. “Foreign Ownership Restrictions and Premiums for International Investment: Some Evidence from the Thai Capital Market.” Journal of Financial Economics, 36 (1994), 57–88.CrossRefGoogle Scholar
Basak, S. “An Intertemporal Model of Segmentation.” Journal of Financial and Quantitative Analysis, 31 (1995), 161–188.CrossRefGoogle Scholar
Bekaert, G. “Market Integration and Investment Barriers in Emerging Equity Markets.” World Bank Economic Review, 9 (1995), 75–107.CrossRefGoogle Scholar
Bekaert, G., and Harvey, C.. “Time-VaryingWorldMarket Integration.” Journal of Finance, 50 (1995), 403–444.Google Scholar
Bekaert, G., and Harvey, C.. “Emerging Equity Market Volatility.” Journal of Financial Economics, 43 (1997), 29–77.CrossRefGoogle Scholar
Bekaert, G., and Harvey, C.. “Foreign Speculator and Emerging Equity Markets.” Journal of Finance, 55 (2000), 565–613.CrossRefGoogle Scholar
Bekaert, G., and Harvey, C.. “Emerging Markets Finance.” Journal of Empirical Finance, 10 (2003), 3–55.CrossRefGoogle Scholar
Bekaert, G.; Harvey, C.; and Lumsdaine, R.. “Dating the Integration ofWorld EquityMarkets.” Journal of Financial Economics, 65 (2002), 203–247.CrossRefGoogle Scholar
Bekaert, G.; Harvey, C.; and Ng, A.. “Market Integration and Contagion.” Journal of Business, 78 (2005), 39–70.CrossRefGoogle Scholar
Bekaert, G., and Wu, G.. “Asymmetric Volatility and Risk in Equity Markets.” Review of Financial Studies, 13 (2000), 1–42.CrossRefGoogle Scholar
Bhattacharya, U., and Daouk, H.. “TheWorld Price of Insider Trading.” Journal of Finance, 57 (2002), 75–108.CrossRefGoogle Scholar
Bollerslev, T., and Wooldridge, J.. “Quasi-Maximum Likelihood Estimation and Inference in Dynamic Models with Time-Varying Covariance.” Economic Reviews, 11 (1992), 143–172.CrossRefGoogle Scholar
Cho, D. C.; Eun, C.; and Senbet, L.. “International Arbitrage Pricing Theory: An Empirical Investigation.” Journal of Finance, 41 (1986), 313–329.CrossRefGoogle Scholar
Cumby, R., and Khanthavit, A.. “A Markov Switching Model ofMarket Integration.” Emerging Market Capital Flows, Levich, Richard M., ed. London: Kluwer Academic Publishers (1998), 237–257.CrossRefGoogle Scholar
de Jong, F., and Roon, F. de. “Time-Varying Market Integration and Expected Returns in Emerging Markets.” Journal of Financial Economics, 78 (2005), 583–613.CrossRefGoogle Scholar
De Santis, G., and Gerard, B.. “International Asset Pricing and Portfolio Diversification with Time Varying Risk.” Journal of Finance, 52 (1997), 1881–1912.Google Scholar
Demirguc-Kunt, A., and Levine, R.. “Stock Market Development and Financial Intermediaries: Stylized Facts.” World Bank Economic Review, 10 (1996), 291–322.CrossRefGoogle Scholar
Dumas, B.; Harvey, C.; 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
Dumas, B., and Solnik, B.. “The World Price of Foreign Exchange Risk.” Journal of Finance, 50 (1995), 445–479.CrossRefGoogle Scholar
Errunza, V. “Foreign Portfolio Equity Investments, Financial Liberalization And Economic Development.” Review of International Economics, Special Issue on International Financial Liberalization, Capital Flows and Exchange Rate Regimes: Essays in Honor of Robert A. Mundell, Vol. 9, No. 4 (2001).Google Scholar
Errunza, V.; Hogan, K.; and Hung, M. W.. “Can the Gains from International Diversification be Achieved without Trading Abroad?” Journal of Finance, 54 (1999), 2075–2107.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
Errunza, V., and Losq, E.. “Capital Flow Controls, International Asset Pricing and Investors' Welfare: A Multi Country Framework.” Journal of Finance, 44 (1989), 1025–1037.Google Scholar
Errunza, V.; Losq, E.; and Padmanabhan, P.. “Tests of Integration, Mild Segmentation and Segmentation Hypotheses.” Journal of Banking and Finance, 16 (1992), 949–972.CrossRefGoogle Scholar
Eun, C., and Janakiramanan, S.. “A Model of International Asset Pricing with a Constraint on the Foreign Equity Ownership.” Journal of Finance, 41 (1986), 897–914.CrossRefGoogle Scholar
Hardouvelis, G.; Malliaropulos, D.; and Priestley, R.. “EMU and European Stock Market Integration.” Journal of Business, 79 (2006), 365–392.CrossRefGoogle Scholar
Harvey, C. “The World Price of Covariance Risk.” Journal of Finance, 46 (1991), 111–157.CrossRefGoogle Scholar
Henry, P. B. “Stock Market Liberalization, Economic Reform, and Emerging Market Equity Prices.” Journal of Finance, 55 (2000), 529–564.CrossRefGoogle Scholar
International Finance Corporation. IFC Index Methodology. World Bank, Washington, DC (1993).Google Scholar
Jorion, P., and Schwartz, E.. “Integration versus Segmentation in the Canadian Stock Market.” Journal of Finance, 41 (1986), 603–613.CrossRefGoogle Scholar
Kaminsky, G., and Schmukler, S.. “Short-Run Pain, Long-Run Gain: The Effects of Financial Liberalization.” Working Paper No. 9787, National Bureau of Economic Research, Working Paper No. 03/34, International Monetary Fund (2003),Working Paper No. 2912,World Bank Policy Research (2002).Google Scholar
Karolyi, A. “The Role of ADRs in the Development and Integration of Emerging Equity Markets.” Working Paper, Ohio State University (2003).Google Scholar
Newey, W., and West, K.. “A Simple Positive Semi-Definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix.” Econometrica, 55 (1987), 703–708.CrossRefGoogle Scholar
Padmanabhan, P. “Investment Barriers and International Asset Pricing.” Review of Quantitative Finance and Accounting, 2 (1992), 299–319.CrossRefGoogle Scholar
Rajan, R., and Zingales, L.. “The Great Reversals: The Politics of Financial Development in the 20th Century.” Journal of Financial Economics, 69 (2003), 5–50.CrossRefGoogle Scholar
Sarkissian, S., and Schill, M.. “The Overseas Listing Decision: New Evidence of the Proximity Preference.” Review of Financial Studies, 17 (2004), 769–809.CrossRefGoogle Scholar
Sellin, P., and Werner, I.. “International Barriers in General Equilibrium.” Journal of International Economics, 34 (1993), 2107–2138.CrossRefGoogle Scholar
Shanno, D. F. “On Broyden-Fletcher-Goldfarb-Shanno Method.” Journal of Optimization Theory and Applications, 46 (1985), 87–94.CrossRefGoogle Scholar
Solnik, B. “The International Pricing of Risk: An Empirical Investigation of theWorld Capital Market Structure.” Journal of Finance, 29 (1974), 365–378.CrossRefGoogle Scholar
Stehle, R. “An Empirical Test of the Alternative Hypotheses of National and International Pricing of Risky Assets.” Journal of Finance, 32 (1977), 493–502.CrossRefGoogle Scholar
Stulz, R. “On the Effects of Barriers to International Investment.” Journal of Finance, 36 (1981), 923–934.CrossRefGoogle Scholar
Stulz, R., and Wasserfallen, W.. “Foreign Equity Investment Restrictions, Capital Flight, and Shareholder Wealth Maximization.” Review of Financial Studies, 8 (1995), 1019–1058.CrossRefGoogle Scholar
Uppal, R. “International Financial Flows with Segmented Goods Markets: A General Equilibrium Analysis.” Working Paper, University of British Columbia (1993).Google Scholar
White, H. “Maximum Likelihood Estimation of Misspecified Models.“ Econometrica, 50 (1982), 1–25.CrossRefGoogle Scholar