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Stock market integration and risk premium: Empirical evidence for emerging economies of South Asia

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  • Abid, Ilyes
  • Kaabia, Olfa
  • Guesmi, Khaled

Abstract

This 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.

Suggested Citation

  • Abid, Ilyes & Kaabia, Olfa & Guesmi, Khaled, 2014. "Stock market integration and risk premium: Empirical evidence for emerging economies of South Asia," Economic Modelling, Elsevier, vol. 37(C), pages 408-416.
    • Handle: RePEc:eee:ecmode:v:37:y:2014:i:c:p:408-416
    DOI: 10.1016/j.econmod.2013.11.015
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    4. Wu, Fei, 2020. "Stock market integration in East and Southeast Asia: The role of global factors," International Review of Financial Analysis, Elsevier, vol. 67(C).
    5. Narayan, Seema & Rehman, Mobeen Ur, 2021. "Can home-biased investors diversify interregionally in the long run?," Economic Modelling, Elsevier, vol. 97(C), pages 167-181.
    6. Guglielmo Maria Caporale & Kefei You, 2017. "Stock Market Integration in Asia: Global or Regional? Evidence from Industry Level Panel Convergence Tests," Discussion Papers of DIW Berlin 1669, DIW Berlin, German Institute for Economic Research.
    7. Khaled Guesmi & Olfa Kaabia & Ilyes Abid, 2017. "ASEAN Plus Three Stock Markets Integration," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 15(3), pages 565-581, September.
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    15. Seema Wati Narayan & Mobeen Ur Rehman & Yi-Shuai Ren & Chaoqun Ma, 2023. "Is a correlation-based investment strategy beneficial for long-term international portfolio investors?," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 9(1), pages 1-26, December.
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    More about this item

    Keywords

    Time-varying integration; Asian markets; Risk premium; ICAPM; GDC-GARCH;
    All these keywords.

    JEL classification:

    • 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; State Space Models

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