Is there heterogeneity in financial integration dynamics? Evidence from country and industry emerging market equity indexes

Michael Donadelli and Antonio Paradiso ()

Journal of International Financial Markets, Institutions and Money, 2014, vol. 32, issue C, 184-218

Abstract: This paper examines the dynamics of the financial integration process across equity markets in one global emerging region (Emerging) and three emerging sub-regions (Asia, Eastern Europe, Latin America) over the last two decades. The proportion of total variation in individual excess returns explained by the first principal component serves as a robust measure of integration. Financial integration is measured in the “national equity market” (market) and in ten different “industrial equity markets” (basic materials, consumer goods, consumer services, financials, healthcare, industrials, oil and gas, telecommunications, technology and utilities). We obtain two main results. First, we observe that the level of integration across emerging equity markets in emerging regions is rather low, both at the country and industry level. Second, the shape of the financial integration process is not homogeneous among different industries. Specifically, J-shaped, U-shaped and increasing trends are observed. Overall, our integration numbers and dynamics simultaneously improve portfolio diversification benefits and reduce risk-sharing opportunities. This is supported by a CAPM-based analysis.

Keywords: Financial integration; PCA; Industries; Systemic banking crises (search for similar items in EconPapers)
JEL-codes: F15 F44 G15 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (29)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:32:y:2014:i:c:p:184-218

DOI: 10.1016/j.intfin.2014.06.003

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