Stock Market Integration: Are Risk Premiums of International Assets Equal?

Kusdhianto Setiawan

Abstract


This paper studies previous research on capital market integration and applies a simple international capital asset pricing model by considering the incompleteness in market integration and heteroscedasticity of the market returns. When we disregarded those two factors, we found that stock markets were integrated and the law of one price on risk premiums prevails. However, when the factors were considered, the markets were just partially integrated.    

References


Adler, M., and B. Dumas. 1983. International portfolio choice and corporation finance: A synthesis. Journal of Finance 38 (3): 925-984.

Arouri, M. E. H, F. Jawadi, and D. K. Nguyen. 2010. The Dynamics of Emerging Stock Markets, Empirical Assessments and Implications. Berlin Heidelberg: Physica-Verlag (Springer).

Calvo, S., and C. M. Reinhart. 1996. Capital flows to Latin America: Is there evidence of contagion effects? In Guillermo A. C., M. Goldstein, and E. Hochreiter (Ed.), Private Capital Flows to Emerging Markets After the Mexican Crisis. Washington, DC: Institute for International Economics.

Buch, C. M. 2004. Globalization of Financial Markets, Causes of Incomplete Integration and Consequences for Economic Policy. Germany: Springer.

Chelley-Steely, P. L., J. M. Steeley, and E. J. Pentecost. 1998. Exchange controls and European stock market integration. Applied Economics 30 (2): 263-267.

Fama, E. F., and K. R. French. 2004. The capital asset pricing model: Theory and evidence. Journal of Economic Perspectives 18: 25–46.

Ferson, W. E., and C. R. Harvey. 1994. Sources of risk and expected returns in global equity markets. Journal of Banking and Finance 18 (4): 775-803.

Forbes, K. J., and R. Rigobon. 2002. No contagion, only interdependence: Measuring stock market comovements. Journal of Finance 57 (5): 2223-2261.

Harvey, C. R. 1995. Predictable risk and returns in emerging markets. Review of Financial Studies 8 (3): 773-816.

King, M. A., and S. Wadhwani. 1990. Transmission of volatility between stock markets. Review of Financial Studies 3: 5-33.

Lee, S. B., and K. J. Kim. 1993. Does the October 1987 crash strengthen the comovements among national stock markets? Review of Financial Economics 3: 89-102.

Lintner, J. 1965. The valuation of risk assets and the selection of risky investments in stock portfolios and capital budgets. Review of Economics and Statistics 47 (1): 13-37.

Merton, R. C. 1972. An analytical derivation of the efficient portfolio frontier. Journal of Financial and Quantitative Analysis 7: 1851-1872.

Mossin, J. 1966. Equilibrium in a capital asset market. Econometrica 34 (4): 768–783.

Mundell, R. A. 1963. Capital mobility and stabilization policy under fixed and flexible exchange rates. The Canadian Journal of Economics and Political Science/ Revue canadienne d’Economique et de Science politique 29 (4): 475–485.

Park, Y. C., and C. Wyplosz. 2010. Monetary and Financial Integration in East Asia: The Relevance of European Experience. USA: Oxford University Press.

Pennacchi, G. 2008. Theory of Asset Pricing. Boston, US: Pearson Education Inc.

Sharpe, W. F. 1964. Capital asset prices: A theory of market equilibrium under conditions of risk. Journal of Finance 19 (3): 425-442.

Setiawan, K. 2012. Reexamination of Dynamic Beta International CAPM: A SUR with GARCH approach. Review of Economic and Business Studies 10 (5-2).

Treynor, J. L. 1961. Market value, time, and risk. Unpublished Manuscript.

Treynor, J. L. 1962. Toward a theory of market value of risky assets. Unpublished Manuscript (A final version was published in 1999 in Robert A. Korajczyk (Ed.), Asset Pricing and Portfolio Performance: Models, Strategy and Performance Metrics (pp. 15–22). London: Risk Books.


Full Text: PDF

DOI: 10.22146/gamaijb.5466

Refbacks

  • There are currently no refbacks.




Copyright (c)