Time-Varying World Market Integration

Geert Bekaert A · Campbell R. Harvey

594 citations0/0 files storedThe Journal of Finance

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Financial Markets and Investment Strategies Global Financial Crisis and Policies Financial Risk and Volatility Modeling

Abstract

We propose a conditional measure of capital market integration that allows us to characterize both the cross-section and time-series of expected returns in developed and emerging markets.Our measure, which arises from a conditional regime-switching model, allows us to describe expected returns in countries that are segmented from world capital markets in one part of the sample and become integrated later in the sample.Our results suggest that a number of emerging markets exhibit time-varying integration.Interestingly, some markets appear to be more integrated than one might expect based on prior knowledge of investment restrictions.Other markets appear segmented even though foreigners have relatively free access to their capital markets.

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References

1964CAPITAL ASSET PRICES: A THEORY OF MARKET EQUILIBRIUM UNDER CONDITIONS OF RISK*1989A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle 1965The Valuation of Risk Assets and the Selection of Risky Investments in Stock Portfolios and Capital Budgets 1995Multivariate Simultaneous Generalized ARCH 1992Quasi-maximum likelihood estimation and inference in dynamic models with time-varying covariances 1972Capital Market Equilibrium with Restricted Borrowing 1985Stock Returns and the Term Structure 1991The World Price of Covariance Risk

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2008Striking oil: Another puzzle?2011What Factors Drive Global Stock Returns?2002Dating the integration of world equity markets 2000Stock Market Openings: Experience of Emerging Economies 2002Are Financial Assets Priced Locally or Globally?1998How big is the premium for currency risk?1We thank Geert Bekaert, Tim Bollerslev, Peter Bossaerts, Mark Carhart, John Cochrane, Magnus Dahlquist, Wayne Ferson, Linda Goldberg, Campbell Harvey, Pierre Hillion, Robert Hodrick (the referee), Olivier Ledoit, John Matsusaka, Hans Mikkelsen, Angel Serrat and Ivo Welch, as well as workshop participants at INSEAD, University of California at Los Angeles, University of Southern California, University of Rochester, Southern Methodist University, University of California – Irvine, Koc University and participants at the 1996 UBC Global Investment Conference (Whistler, BC), 1996 Western Finance Association meetings (Sunriver, OR), 1996 European Finance Association meetings (Oslo, Norway), 1996 NBER Asset Pricing meeting (Evanston, IL), and the 1997 Econometric Society winter meetings (New Orleans, LA) for their comments. The paper was written while the second author was visiting the Anderson School at UCLA. Both authors acknowledge the financial support of a CIBEAR grant.1

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