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Financial market integration: Theory and empirical results

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Listed author(s):
  • 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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    File URL: http://www.sciencedirect.com/science/article/pii/S0264999311002720
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    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
    DOI: 10.1016/j.econmod.2011.11.009
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30411

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

    Find related papers by JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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    Cited by:

    1. Garg, Reetika & Dua, Pami, 2014. "Foreign Portfolio Investment Flows to India: Determinants and Analysis," World Development, Elsevier, vol. 59(C), pages 16-28.
    2. Jonathan A. Batten & Peter Morgan & Peter G. Szilagyi, 2015. "Time Varying Asian Stock Market Integration," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 60(01), pages 1-24.
    3. Balcilar, Mehmet & Kutan, Ali M. & Yaya, Mehmet E., 2017. "Testing the dependency theory on small island economies: The case of Cyprus," Economic Modelling, Elsevier, vol. 61(C), pages 1-11.

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