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A Non-Parametric Examination of Emerging Equity Markets Financial Integration

In: HANDBOOK OF FINANCIAL ECONOMETRICS, MATHEMATICS, STATISTICS, AND MACHINE LEARNING

Author

Listed:
  • Ke Yang
  • Susan Wahab
  • Bharat Kolluri
  • Mahmoud Wahab

Abstract

Prior studies on financial markets integration use parametric estimators whose underlying assumptions of linearity and normality are, at best, questionable, particularly when using high frequency data. We re-examine the evidence regarding financial integration trends using data for 14 emerging equity markets from Southeast Asia, Latin America, and the Middle East, along with US and Japan. We employ non-parametric estimators of Pukthuanthong and Roll’s (2009) adjusted R2 measure of financial integration. Results from non-parametric estimators are contrasted with results from parametric estimators of adjusted R2 financial integration measure using bi-daily returns for contiguous yearly sub-periods from 1993 to 2016. We find two key results. First, we confirm prior evidence in Pukthuanthong and Roll (2009) that simple correlation (SC) understates financial integration trends compared to parametric adjusted R2. Second, parametric adjusted R2 understates financial integration trends relative to non-parametric adjusted R2. Hence, emerging equity markets may be more financially integrated, and offer fewer diversification benefits to global investors than previously thought. The results underscore the need to exercise caution when drawing inferences regarding financial markets integration using parametric estimators.

Suggested Citation

  • Ke Yang & Susan Wahab & Bharat Kolluri & Mahmoud Wahab, 2020. "A Non-Parametric Examination of Emerging Equity Markets Financial Integration," World Scientific Book Chapters, in: Cheng Few Lee & John C Lee (ed.), HANDBOOK OF FINANCIAL ECONOMETRICS, MATHEMATICS, STATISTICS, AND MACHINE LEARNING, chapter 118, pages 4043-4074, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789811202391_0118
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    More about this item

    Keywords

    Financial Econometrics; Financial Mathematics; Financial Statistics; Financial Technology; Machine Learning; Covariance Regression; Cluster Effect; Option Bound; Dynamic Capital Budgeting; Big Data;
    All these keywords.

    JEL classification:

    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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