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Time-Varying Market Integration and Expected Returns in Emerging Markets

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  • de Jong, Frank
  • de Roon, Frans

Abstract

We use a simple model in which the expected returns in emerging markets depend on their systematic risk as measured by their beta relative to the world portfolio as well as on the level of integration in that market. The level of integration is a time-varying variable that depends on the market value of the assets that can be held by domestic investors only versus the market value of the assets that can be traded freely. Our empirical analysis for 30 emerging markets shows that there are strong effects of the level of integration or segmentation on the expected returns in emerging markets. The expected returns depend both on the level of segmentation of the emerging market itself and on the regional segmentation level. We also find that there is significant time-variation in the betas relative to the world portfolio because of the level of segmentation. For the composite index of the emerging markets we find an annual increase in beta of 0.09 due to decreased segmentation of the emerging markets in our sample period. In terms of expected returns the total effect on the composite index translates into an average decrease of 4.5% per annum. As predicted by our model, the noninvestable assets are more sensitive to the local and less to the regional level of segmentation than the investable assets. These conclusions do not change when using additional control variables. We do not find a clear pattern between volatility and segmentation, however.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3102.

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Date of creation: Dec 2001
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Handle: RePEc:cpr:ceprdp:3102

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Keywords: asset pricing; emerging markets; market integration;

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References

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  1. Geert Bekaert & Campbell R. Harvey, 1997. "Foreign Speculators and Emerging Equity Markets," NBER Working Papers 6312, National Bureau of Economic Research, Inc.
  2. Kim, E Han & Singal, Vijay, 2000. "Stock Market Openings: Experience of Emerging Economies," The Journal of Business, University of Chicago Press, vol. 73(1), pages 25-66, January.
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  13. Bekaert, Geert & Harvey, Campbell R. & Lundblad, Christian, 2005. "Does financial liberalization spur growth?," Journal of Financial Economics, Elsevier, vol. 77(1), pages 3-55, July.
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  17. Kim, E Han & Singal, Vijay, 2000. "Erratum [Stock Market Openings: Experience of Emerging Economies]," The Journal of Business, University of Chicago Press, vol. 73(4), pages na, October.
  18. René M. Stulz, 1999. "Golbalization, Corporate Finance, And The Cost Of Capital," Journal of Applied Corporate Finance, Morgan Stanley, vol. 12(3), pages 8-25.
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