Working Paper: NBER ID: w4843
Authors: Geert Bekaert; Campbell R. Harvey
Abstract: We propose a conditional measure of capital market integration that allows us to characterize both the cross-section and time-series of expected returns in developed and emerging markets. Our measure, which arises from a conditional regime-switching model, allows us to describe expected returns in countries that are segmented from world capital markets in one part of the sample and become integrated later in the sample. Our results suggest that a number of emerging markets exhibit time-varying integration. Interestingly, some markets appear to be more integrated than one might expect based on prior knowledge of investment restrictions. Other markets appear segmented even though foreigners have relatively free access to their capital markets.
Keywords: Capital Market Integration; Expected Returns; Emerging Markets
JEL Codes: G12; F36
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| integration status (F15) | expected returns in integrated markets (G19) |
| integration status (F15) | expected returns in segmented markets (G19) |
| time-varying integration (C32) | expected returns (G17) |
| integration measure (F15) | covariance with world portfolio (C10) |
| integration measure (F15) | variance of country returns (C29) |