Market integration in developed and emerging markets: Evidence from the CAPM

Applying an international CAPM to herding behaviour model for integrated stock markets

“…In this stage, we adopt the similar method worked by Arshad (2017), Bruner et al (2008), and Koedijk et al (2002) who applied International CAPM model to examine the level of integration of a stock market towards world stock market. The first step we estimate the local (national) CAPM for each stock market by working time series regressions of each individual stock return (Rit) on its respective daily local market return (Rmt) over the sample period expressed by the equation as follows: Rit = α + βim Rmt + εi (6) Where Rit is the ex post return on stock i at day t; Rmt is the ex post return observed for local market at day t; βim is local market beta of each firm i produced by time series regression of each individual stock returns on local market index return; εi is error term.…”

“…Koedijk et al (2002) and Bruner et al (2008) investigate the sensitivity of individual stock returns on the home country and global indices for different stock markets and in different periods by implementing domestic CAPM and International CAPM. They find varying evidence and conclude that the choice of which model better fits the data, the domestic CAPM using the home country index or the International CAPM using global index, depends on the level of global market integration.…”

Bubbles in China

“…provide more evidence of this, as the authors show that the simple correlation across markets is a poor measure of integration and that even the perfectly integrated markets can exhibit zero correlation. Several studies have suggested alternative measures and reported that the emerging markets (and even some of the developed markets) are still in a state of partial integration (see for example ;, ; Bruner et al (2008); ). Although these studies find that local risks are still important determinants of the emerging markets returns, their importance has decreased during the recent years, indicating that the emerging markets are becoming more integrated.…”

Corporate Governance and Financial Performance in the Emerging Markets: Do ADRs Perform any Better than Non-Cross-Listed Firms?

“…For firms in the emerging markets, however, identifying an appropriate measure of risk can present problems when estimating the cost of capital because of the time-varying nature of the integration of these markets into the global economy. Nonetheless, the exposure of a firm to the risks inherent in its local market remains an important element of the overall risk assessment [48][49][50]. Although, research has demonstrated that both market risk and governance have a significant impact on the financial performance of firms, it remains necessary to develop a more complex and dynamic theoretical model than has been previously considered; a model that reflects how market risk moderates the governance-performance relationship in the emerging markets.…”