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A Measure of Stock Market Integration for Developed and Emerging Markets

  • Korajczyk, Robert A

A wide array of official capital controls across countries makes it difficult to perform cross-sectional analysis of the effects of market segmentation. This article constructs a measure of deviations from capital market integration that can be consistently applied across countries. It measures the deviations of asset returns from an equilibrium model of returns constructed assuming market integration. Applying the measure to stock returns from twenty-four national markets indicates that market segmentation tends to be much larger for emerging markets than for developed markets, and that the measure tends to decrease over time. Along several dimensions, the proposed measure yields results that are consistent with reasonable priors about the relations between effective integration and explicit capital controls, capital market development, and economic growth. Copyright 1996 by Oxford University Press.

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Article provided by World Bank Group in its journal World Bank Economic Review.

Volume (Year): 10 (1996)
Issue (Month): 2 (May)
Pages: 267-89

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Handle: RePEc:oup:wbecrv:v:10:y:1996:i:2:p:267-89
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  1. Demirguc-Kunt, Ash & Levine, Ross, 1996. "Stock Market Development and Financial Intermediaries: Stylized Facts," World Bank Economic Review, World Bank Group, vol. 10(2), pages 291-321, May.
  2. Bonser-Neal, Catherine, et al, 1990. " International Investment Restrictions and Closed-End Country Fund Prices," Journal of Finance, American Finance Association, vol. 45(2), pages 523-47, June.
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  4. Campbell R. Harvey, 1994. "Predictable Risk and Returns in Emerging Markets," NBER Working Papers 4621, National Bureau of Economic Research, Inc.
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  8. Huberman, Gur, 1982. "A simple approach to arbitrage pricing theory," Journal of Economic Theory, Elsevier, vol. 28(1), pages 183-191, October.
  9. Bailey, Warren & Jagtiani, Julapa, 1994. "Foreign ownership restrictions and stock prices in the Thai capital market," Journal of Financial Economics, Elsevier, vol. 36(1), pages 57-87, August.
  10. Gary Chamberlain & Michael Rothschild, 1981. "Arbitrage and Mean-Variance Analysis on Large Asset Markets," NBER Technical Working Papers 0015, National Bureau of Economic Research, Inc.
  11. Gregory Connor and Robert Korajczyk., 1987. "An Intertemporal Equilibrium Beta Pricing Model," Research Program in Finance Working Papers 176, University of California at Berkeley.
  12. Ross Levine, 1986. "An international arbitrage pricing model with PPP deviations," International Finance Discussion Papers 294, Board of Governors of the Federal Reserve System (U.S.).
  13. Connor, Gregory & Korajczyk, Robert A, 1993. " A Test for the Number of Factors in an Approximate Factor Model," Journal of Finance, American Finance Association, vol. 48(4), pages 1263-91, September.
  14. Bekaert, Geert & Harvey, Campbell R, 1995. " Time-Varying World Market Integration," Journal of Finance, American Finance Association, vol. 50(2), pages 403-44, June.
  15. Claessens, Stijn & Dasgupta, Susmita & Glen, Jack, 1995. "The cross-section of stock returns : evidence from emerging markets," Policy Research Working Paper Series 1505, The World Bank.
  16. Connor, Gregory, 1984. "A unified beta pricing theory," Journal of Economic Theory, Elsevier, vol. 34(1), pages 13-31, October.
  17. Chuppe, Terry M. & Atkin, Michael, 1992. "Regulation of securities markets : some recent trends and their implications for emerging markets," Policy Research Working Paper Series 829, The World Bank.
  18. Cumby, Robert E., 1990. "Consumption risk and international equity returns: some empirical evidence," Journal of International Money and Finance, Elsevier, vol. 9(2), pages 182-192, June.
  19. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
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