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Market integration in developed and emerging markets: Evidence from the CAPM

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  • Bruner, Robert F.
  • Li, Wei
  • Kritzman, Mark
  • Myrgren, Simon
  • Page, Sébastien
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    Abstract

    Beta, as measured by the Capital Asset Pricing Model (CAPM), is widely used for pricing stocks, determining the cost of capital, and gauging the extent to which markets are integrated. The CAPM model assumes that equilibrium conditions prevail. The choice of which market portfolio to use in the regression - the home country or global index - depends on the level of global market integration. We present several new empirical observations on the pricing of stocks and market integration. We provide guidance on how practitioners should calculate beta on securities in various developed and emerging markets.

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    Bibliographic Info

    Article provided by Elsevier in its journal Emerging Markets Review.

    Volume (Year): 9 (2008)
    Issue (Month): 2 (June)
    Pages: 89-103

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    Handle: RePEc:eee:ememar:v:9:y:2008:i:2:p:89-103

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    Web page: http://www.elsevier.com/locate/inca/620356

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    References

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    1. Harvey, Campbell R, 1991. " The World Price of Covariance Risk," Journal of Finance, American Finance Association, vol. 46(1), pages 111-57, March.
    2. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, 09.
    3. Koedijk, Kees G. & Kool, Clemens J. M. & Schotman, Peter C. & van Dijk, Mathijs A., 2002. "The cost of capital in international financial markets: local or global?," Journal of International Money and Finance, Elsevier, vol. 21(6), pages 905-929, November.
    4. Rene M. Stulz, 1994. "International Portfolio Choice and Asset Pricing: An Integrative Survey," NBER Working Papers 4645, National Bureau of Economic Research, Inc.
    5. Mishra, Dev R. & O'Brien, Thomas J., 2005. "Risk and ex ante cost of equity estimates of emerging market firms," Emerging Markets Review, Elsevier, vol. 6(2), pages 107-120, June.
    6. Robert S. Harris & Felicia C. Marston & Dev R. Mishra & Thomas J. O’Brien, 2003. "Ex Ante Cost of Equity Estimates of S&P 500 Firms: The Choice Between Global and Domestic CAPM," Financial Management, Financial Management Association, vol. 32(3), Fall.
    7. Engle, Robert F & Lilien, David M & Robins, Russell P, 1987. "Estimating Time Varying Risk Premia in the Term Structure: The Arch-M Model," Econometrica, Econometric Society, vol. 55(2), pages 391-407, March.
    8. Gordon M. Bodnar & Bernard Dumas & Richard D. Marston, 2003. "Cross-Border Valuation: The International Cost of Equity Capital," NBER Working Papers 10115, National Bureau of Economic Research, Inc.
    9. Mishra, Dev R & O'Brien, Thomas J, 2001. "A Comparison of Cost of Equity Estimates of Local and Global CAPMs," The Financial Review, Eastern Finance Association, vol. 36(4), pages 27-47, November.
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    Cited by:
    1. Antonio Diez de los Rios, 2007. "Exchange Rate Regimes, Globalisation, and the Cost of Capital in Emerging Markets," Working Papers 07-29, Bank of Canada.
    2. Frijns, Bart & Tourani-Rad, Alireza & Indriawan, Ivan, 2012. "Political crises and the stock market integration of emerging markets," Journal of Banking & Finance, Elsevier, vol. 36(3), pages 644-653.
    3. Arouri Mohamed el hédi & Jamel Jouini, 2009. "Analysis of structural breaks in the stock market integration of mexico into world," Economics Bulletin, AccessEcon, vol. 29(2), pages 1380-1392.

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