Stock market integration and risk premium: Empirical evidence for emerging economies of South Asia
AbstractThis article investigates the dynamics of regional financial integration and its determinants in an international setting. We test a conditional version of the International Capital Asset Pricing Model (ICAPM) accounting for the deviations from Purchasing Power Parity (PPP) as well as temporal variations in both regional and local sources of risk. Using data from five major South Asian markets (Malaysia, Thailand, Singapore, Indonesia, and Sri Lanka), our results support the validity of an ICAPM and indicate that the risk is regionally priced. Furthermore, we show that changes in the degree of regional stock market integration are explained principally by the U.S. term premium, and the level of market openness, whatever the measure of currency risk. Finally, and as expected, the degree of stock market integration varies considerably over time and from one market to another. As intense market integration induces both benefits and risks, our findings should have significant implications for economic policies and market regulations in emerging, frontier-emerging and transition countries, particularly for countries from the same region.
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Bibliographic InfoArticle provided by Elsevier in its journal Economic Modelling.
Volume (Year): 37 (2014)
Issue (Month): C ()
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Web page: http://www.elsevier.com/locate/inca/30411
Time-varying integration; Asian markets; Risk premium; ICAPM; GDC-GARCH;
Other versions of this item:
- Khaled GUESMI & Ilyes ABID & Olfa KAABIA, 2014. "Stock Market Integration and Risk Premium: Empirical Evidence for Emerging Economies of South Asia," Working Papers 2014-444, Department of Research, Ipag Business School.
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- F31 - International Economics - - International Finance - - - Foreign Exchange
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
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