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

Ilyes Abid, Olfa Kaabia and Khaled Guesmi

Economic Modelling, 2014, vol. 37, issue C, 408-416

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.

Keywords: Time-varying integration; Asian markets; Risk premium; ICAPM; GDC-GARCH (search for similar items in EconPapers)
JEL-codes: C32 F31 G12 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (21)

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Working Paper: Stock Market Integration and Risk Premium: Empirical Evidence for Emerging Economies of South Asia (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:37:y:2014:i:c:p:408-416

DOI: 10.1016/j.econmod.2013.11.015

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