How strong is the global integration of emerging market regions? An empirical assessment
AbstractThis paper attempts to evaluate the time-varying integration of emerging markets from a regional perspective based on a conditional version of the International Capital Asset Pricing Model (ICAPM) with DCC-GARCH parameters that allows for dynamic changes in the degree of market integration, global market risk premium, regional exchange-rate risk premium, and local market risk premium. Our findings reveal several interesting facts. First, the time-varying degree of integration of four emerging regions under consideration, satisfactorily explained by the regional level of trade openness and the term premium of US interest rates, has recently tended to increase, but these markets still remain substantially segmented from the world market. Second, the local market risk premium is found to explain more than 50% of the total risk premium for emerging market returns. Finally, we show that conditional correlations usually underestimate and overstate the measure of time-varying market integration. The empirical results of this study have some important implications for both global investors and policymakers with respect to dedicated portfolio investments in emerging markets and policy adjustments.
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Bibliographic InfoArticle provided by Elsevier in its journal Economic Modelling.
Volume (Year): 28 (2011)
Issue (Month): 6 ()
Contact details of provider:
Web page: http://www.elsevier.com/locate/inca/30411
Time-varying integration; Emerging markets; ICAPM; Risk premium; DCC-GARCH;
Other versions of this item:
- Khaled Guesmi & Duc Khuong Nguyen, 2011. "How strong is the global integration of emerging market regions? An empirical assessment," EconomiX Working Papers 2011-9, University of Paris West - Nanterre la Défense, EconomiX.
- F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
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