How strong is the global integration of emerging market regions? An empirical assessment

Khaled Guesmi and Duc Khuong Nguyen

Economic Modelling, 2011, vol. 28, issue 6, 2517-2527

Abstract: This paper attempts to evaluate the time-varying integration of emerging markets from a regional perspective based on a conditional version of the International Capital Asset Pricing Model (ICAPM) with DCC-GARCH parameters that allows for dynamic changes in the degree of market integration, global market risk premium, regional exchange-rate risk premium, and local market risk premium. Our findings reveal several interesting facts. First, the time-varying degree of integration of four emerging regions under consideration, satisfactorily explained by the regional level of trade openness and the term premium of US interest rates, has recently tended to increase, but these markets still remain substantially segmented from the world market. Second, the local market risk premium is found to explain more than 50% of the total risk premium for emerging market returns. Finally, we show that conditional correlations usually underestimate and overstate the measure of time-varying market integration. The empirical results of this study have some important implications for both global investors and policymakers with respect to dedicated portfolio investments in emerging markets and policy adjustments.

Keywords: Time-varying integration; Emerging markets; ICAPM; Risk premium; DCC-GARCH (search for similar items in EconPapers)
JEL-codes: F36 G15 (search for similar items in EconPapers)
Date: 2011
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (48)

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Working Paper: How strong is the global integration of emerging market regions? An empirical assessment (2011)
Working Paper: How strong is the global integration of emerging market regions? An empirical assessment (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:28:y:2011:i:6:p:2517-2527

DOI: 10.1016/j.econmod.2011.07.006

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