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Financial market integration: Theory and empirical results

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  • Arouri, Mohamed El Hedi
  • Foulquier, Philippe
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    Abstract

    In this article, we introduce a new theoretical international asset pricing model which accounts for partial financial market segmentation. We show that if some investors do not hold all international assets because of implicit and/or explicit segmentation factors, the world market portfolio is not efficient and the classic ICAPM must be augmented by a new factor reflecting the local risk undiversifiable internationally. We test this model empirically for a sample of emerging markets. Our findings show that the degree of market integration is time-varying and that the premium associated with the domestic risk factors is the most important component of the total risk premium. However, our results also show that most of the emerging markets we study have become more integrated in the end of our sample period as a result of liberalization and reforms.

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    Bibliographic Info

    Article provided by Elsevier in its journal Economic Modelling.

    Volume (Year): 29 (2012)
    Issue (Month): 2 ()
    Pages: 382-394

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    Handle: RePEc:eee:ecmode:v:29:y:2012:i:2:p:382-394

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    Web page: http://www.elsevier.com/locate/inca/30411

    Related research

    Keywords: International asset pricing; Segmentation; Emerging markets; Multivariate GARCH;

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    References

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