Equity Risk Premium and Regional Integration

Transcription

1 Equy Rsk Premum and Regonal Inegraon Mohamed El Hed Arour, Chrsophe Raul, Frédérc Teulon To ce hs verson: Mohamed El Hed Arour, Chrsophe Raul, Frédérc Teulon. Equy Rsk Premum and Regonal Inegraon <hal > HAL Id: hal hps://hal.archves-ouveres.fr/hal Submed on 7 Mar 013 HAL s a mul-dscplnary open access archve for he depos and dssemnaon of scenfc research documens, wheher hey are publshed or no. The documens may come from eachng and research nsuons n France or abroad, or from publc or prvae research ceners. L archve ouvere plurdscplnare HAL, es desnée au dépô e à la dffuson de documens scenfques de nveau recherche, publés ou non, émanan des éablssemens d ensegnemen e de recherche franças ou érangers, des laboraores publcs ou prvés.

2 Equy Rsk Premum and Regonal Inegraon Mohamed El Hed Arour CRCGM-Unversé d Auvergne & EDHEC Busness School Mohamed.Arour@edhec.edu Chrsophe Raul BEM Bordeaux Managemen School chraul@homal.com Frédérc Teulon IPAG Busness School, IPAG Lab f.eulon@pag.fr Absrac Ths arcle conrbues o he leraure on sock marke negraon by developng and esmang a capal asse prcng model wh segmenaon effecs n order o assess sock marke segmenaon and s effecs on rsk prema a he regonal level. We show ha he esmaed degrees of segmenaon vary from one regon o anher and over me. Moreover, we esablsh ha compared o developed marke regons, emergng marke regons have four man dssmlares: he oal rsk premums are sgnfcanly hgher, more volale, domnaed by regonal resdual rsk facors and reflec mosly regonal evens. However, n he recen perod emergng marke regons have become less segmened as a resul of lberalzaon and reforms and he relave magnude of he premum assocaed wh global facors has ncreased. JEL classfcaon: G15, F36, C3. Keywords: Asse Prcng, Regonal Inegraon, Equy Rsk Premum. 1

3 1- Inroducon Compared o prevous works on sock marke negraon, hs arcle has a leas wo conrbuons o he fnance leraure. Frs, we exend avalable heorecal capal asse prcng models (CAPM) for parally negraed markes n order o propose a model ha assesses sock marke negraon a regonal level raher han counry level. Second, we nvesgae he effecs of changes n marke segmenaon on rsk prema by dsngushng he relave conrbuons of global rsk facors and resdual regonal rsk facors. I s now well documened ha deermnng he exen o whch a naonal marke s negraed no he world sock marke s a queson whch has a decsve mpac on a number of ssues affecng problems ha are addressed by fnance heory such as asse prcng and corporae capal budgeng decsons. If capal markes are fully negraed, nvesors face common and specfc rsks, bu prce only common rsk facors because specfc rsk s fully dversfed nernaonally. In hs case, he same asse prcng relaonshps apply n all counres and regons and expeced reurns should be deermned solely by global rsk facors. In conras, when capal markes are segmened he asse prcng relaonshp vares from one counry or regon o anoher and domesc rsk facors deermne expeced reurns. When capal markes are parally segmened, nvesors face boh common and specfc rsks and prce hem boh. In hs case, expeced reurns should be deermned by a combnaon of local, regonal and global rsk sources (Karoly & Sulz, 00; Kearney & Lucey, 004). Sock marke negraon dynamc s affeced by boh nsuonal and behavoral facors. Frs, fnancal negraon s a resul of economc, nsuonal and polcal reform. In parcular, negraon depends on he ably of global nvesors o access domesc secures as well as he ably of domesc nvesors o access foregn nvesmen opporunes. In fac, access o worldwde nernaonal nvesmen opporunes and homemade dversfcaon ncrease he exposon of domesc asses o global rsk facors and herefore mprove he domesc or regonal sock marke negraon level. Second, behavoral facors such as rsk averson, relave opmsm, and nformaon percepon may also affec he desre o nves abroad and hus marke negraon. In recen decades, barrers o foregn nvesmen have been removed, counry funds have been nroduced and Amercan deposory receps have been lsed n order o

4 develop fnancally negraed sock markes. In fac, a move owards negraed sock markes should lead o a lower cos of capal, greaer nvesmen opporunes, and hgher savngs and growh made possble by nernaonal rsk sharng (Sulz, 1999; Bekaer & Harvey, 003; Carrer e al., 007). Ths process of sock marke negraon s complex, gradual and akes years (Bekaer & Harvey, 1995). Mos naonal and regonal sock markes should be beween he heorecal exremes of src segmenaon (negraon zero) and perfec negraon; n oher words hey are parally negraed. Therefore, assessng he degree of marke negraon s a purely emprcal queson ha can appropraely be addressed only whn he conex of an nernaonal capal asse prcng model. In he fnance leraure, here are heorecal domesc asse prcng models n whch s assumed ha markes are srcly segmened (Sharpe, 1964; Ross, 1976) and heorecal nernaonal asse prcng models n whch s assumed ha markes are perfecly negraed (Adler & Dumas, 1983; Solnk, 1983). However, here are no heorecal nernaonal asse prcng models for parally segmened markes, excep hose developed n he ven of Sulz (1981) and Errunza and Losq (1985) and Arour e al. (01). There are, neverheless, several emprcal models of paral segmenaon ncludng Bekaer and Harvey (1995), Adler and Q (003), Hardouvels e al. (006), Carrer e al. (007), Arour e al. (010), Lucey and Muckley (011) and Gupa and Gud (01). These models offer a pure economerc combnaon of local and global rsk facors and aemp ad-hoc ess of marke negraon. Moreover, a he bes of our knowledge, all prevous works nvesgae marke negraon a he ndvdual counry level. Our arcle conrbues o hese prevous works n wo ways. Frs, we develop an nernaonal condonal capal asse prcng model wh segmenaon effecs n order o assess he degree of segmenaon and denfy he deermnans of rsk premum and measure her conrbuon o he formaon of he oal premum. Our model allows for dfferen marke srucures (perfec negraon, src segmenaon and paral negraon). Second, we propose a suable economerc framework usng a mulvarae GARCH-n-Mean mehodology and esmae our model a he regonal level raher han he ndvdual counry level. Indeed, lle aenon has been pad o he dynamcs of he negraon of emergng marke regons no he world marke. However, regonal cooperaon has been nensfed n recen years and regonal negraon has now become an undenable rend hanks o s heorecal expeced advanages. Regonal 3

5 negraon may offer o naonal emergng sock markes ways o overcome some of he obsacles consranng her developmen. Possble benefs assocaed wh regonal negraon of exchanges are more possbles of dversfcaon of rsks n more effcen and compeve markes, and lower coss. By poolng he resources of fledglng and fragmened capal markes, regonalzaon could boos lqudy and he ably of hese markes o moblze local and nernaonal capal for prvae-secor and nfrasrucural developmen. Invesors would gan access o a broader range of shares; ssuers would gan access o a larger number of nvesors. There may also be a role for a well-funconng regonal exchange n prevenng large capal ouflows from he regon. Moreover, progress oward negraon of capal markes on a regonal bass may acually help spur acceleraed economc negraon goals n oher areas. For example, he harmonzaon of sock marke regulaons and radng pracces ha would accompany any regonalzaon of exchanges could deepen regonal negraon more broadly n polcy areas such as axaon, accounng sandards, corporae governance, and legal pracces. The res of he arcle s organzed as follows. Secon nroduces he model and he emprcal mehodology. Secon 3 dscusses he relaed prevous works. Secon 3 presens he daa and dscusses our maor emprcal resuls. Concludng remarks and fuure exensons are n secon 4. - The model and emprcal mehodology.1- The model Unlke prevous works, our dea s no o mpose a parcular form of segmenaon such as a ax or anoher explc barrer o nernaonal nvesmens and derve effecs on equlbrum asse reurns (Black, 1974; Sulz, 1981; Errunza & Losq, 1985; Cooper & Kaplans, 000). We raher assume smply ha some global nvesors do no wan and/or do no have access o foregn asses as a resul of explc and/or mplc barrers on nflows and/or ouflows, barrers whch may make markes parally segmened. The avalable heorecal and emprcal models mposng a parcular form of segmenaon can be vewed as parcular cases of our general model. 4

6 Consder a world wh c regons 1 and l 1 ypes of nvesors. Because of drec and/or ndrec barrers, we assume ha nvesors of ype ( 0,1,, l ) have no access/or do no wan o access o k ( k c 0 ) asses,.e. nvesors of ype access o c asses; hey a leas access o he asses of her regon f her regon s srcly k segmened. Denoe by D be he (( c k ) 1) vecor of nvesor s amoun (expressed n he reference counry currency) nvesed n he c rsky asses o whch nvesors of ype k access. We can wre hs demand as a ( c 1) vecor by seng D J D, where J s a c ( c k )) marx equal o he c k ) ( c k )) deny marx augmened by ( (( k zero-lnes correspondng o he k naonal asses o whch nvesors have no access. Le be he (( c k ) ( c k )) varance-covarance marx of he c k asses o whch nvesors of ype have access and E (R ) he (( c k ) 1) vecor of expeced reurns on hese asses. The maxmsaon of he uly of nvesors subec o her budge consrans leads o he followng demand funcon: 1 1 D ( E ( R ) r1) where represens he rsk averson coeffcen. (1) Denoe by l n he number of nvesors of ype, n n 0 he oal number of nvesors, and S s, s,, s ) he supply of he c rsky asses. Aggregang he ( 1 c demand of asses by all nvesors and equalzng oal demand and oal supply lead o he followng expresson for he expeced excess reurn on he rsky asses: l n 1 E ( R ) r1 [ n n 0 1 J 1 J ] S () 1 For smplcy, we consder one rsky asse from each regon. However, he number of suded asses does no affec our fnal resuls. Suppose for smplcy ha k

7 Compared o he radonal model, equaon () shows ha because regons are no compleely negraed as nvesors do no access all rsky asses, he oal supply S s replaced n he equlbrum valuaon relaon by an adused supply funcon: 1 l 0 n 1 1 J J ] S n [. Therefore, nvesors are subec o an alered world marke porfolo. The radonal nernaonal CAPM connues o hold wh regard o hs alered porfolo bu does no hold wh regard o he acual world marke porfolo. By conras, f regons were perfecly negraed and nvesors had access o all asses, he supply funcon would be equal o S and he radonal CAPM wll hold wh regard o he acual world marke porfolo. The greaer he segmenaon of he marke, he greaer he dfference from S of he supply funcon used n he equlbrum valuaon relaon. Equaon () can be smplfed as follows: E R r ( ) 1 S n n l 1 n S (3) where l n n [1 ][ I J J ] I. 1 n Le C S 1 be he world marke capalzaon expressed n he reference counry S currency and be he vecor of proporons of he c rsky asses n he world sock C marke. Mulply equaon (3) by he vecor of capalsaons ( ), we oban he expresson of he reurn on he world marke E ( R w ) E ( R ) : l E R w ) r wc n w C n n 1 ( (4) where. By subsung (4) no (3), we oban: 6

8 7 ] [ ) ( 1 ) ) ( ( 1 ) ( 1 1 w w w l l w r R E n n r R E r R E (5) Whch can fnally leads o our asse prcng model for parally negraed regons: d R w r E r R E ) ) ( ( 1 ) ( (6) where l l n n s a parameer reflecng he nernaonal sock marke srucure. When marke segmenaon s weak and he number of consraned nvesors s nsgnfcan, 0. The erm ] [ w d measures he regonal rsk unrelaed o nernaonal porfolo marke. In perfecly negraed markes, hs rsk s no rewarded because s elmnaed by nernaonal porfolo dversfcaon. However, equaon (6) says ha because of sock marke segmenaon a par of hs regonal rsk s nernaonally prced. We call hs par undversfable regonal rsk whch, as shown by equaon (6), s measured by d V. More neresng, equaon (6) shows also ha he prce of hs nernaonal undversfable regonal rsk s equal o he world prce of marke rsk ( ). In oher words, hs rsk s ranslaed no a rsk premum comparable o ha requred on world marke rsk. For a parcular domesc regon, equaon (6) can wren as follows: w R R Cov r R E ), ( ) ( (7) where w s he regonal rsk unexplaned by he model..-the emprcal mehodology Under raonal expecaons, equaon (6) can be wren as follows:

9 R w r Cov ( R, R / ) ( ) (8) 1 where 1 s he se of nformaon avalable o nvesors a me (-1). measures he proporon of regonal rsk unexplaned by he model ( ) nernaonally prced because of marke segmenaon. Inuvely, can be seen as a measure of sock marke segmenaon and should vary beween 0 and 1 dependng on regonal and nernaonal marke srucures. Economercally, equaon (8) can be ranslaed as follows: R w r h h (9) where hw h h hw, h s he emprcal measure of he covarance of he marke and he marke and h s he varance of marke. s a parameer beween 0 and 1 measurng he degree of segmenaon of regon no he world marke. If 0, he regon s perfecly negraed and hus only global rsk s prced. The more rses, he more he conrbuon of he undversfable regonal rsk ncreases and he less marke s negraed. On he oher hand, equaon (9) has o hold for every asse ncludng he marke porfolo. For an economy wh c regons, he followng sysem of prcng resrcons has o be sasfed a any pon n me: R H r 1 h c C C aa * * q 1 1 bb * H / 1 1 ~ 0, where q D H h N * h N / h NN, and R denoes he c 1 vecor ha ncludes c 1 rsky asses and he world marke porfolo. s he c c condonal covarance marx of asse reurns, (10) h N s he N h column of composed of he condonal covarance of each asse wh he marke porfolo and h NN he condonal varance of he world marke porfolo. s he c 1 vecor of parameers, q s he c 1 vecor on undversfable domesc rsk, D he dagonal componens n H 8

10 and * denoes he Hadamard marx produc. The dynamcs of condonal momens are specfed by he dagonal mulvarae parsmonous GARCH process orgnally proposed by Dng and Engle (1994) and hen generalzed by De Sans and Gérard (1997) o accommodae he GARCH-n-Mean effecs. C s a c c lower rangular marx and a and b are c 1 vecors of unknown parameers. To avod ncorrec nferences semmng from he msspecfcaon of he condonal densy of asse reurns he quas-maxmum lkelhood (QML) approach of Bollerslev and Wooldrdge (199) s used o esmae equaon (10). The Smplex algorhm s used o nalze he process, hen he esmaon s performed usng he BFGS algorhm. 3- Daa and emprcal resuls 3.1- Daa In hs sub-secon, we nroduce he daa we use n our emprcal nvesgaon and show ha he daa conan feaures ha can be capured wh a GARCH model. As he am of hs arcle s o examne sock marke negraon a he regonal level, we use monhly reurns on regonal sock ndces for egh regons (4 emergng regons: Emergng Markes ASIA, Emergng Markes Europe, Emergng Markes Far-Eas, Emergng Markes Lan Amerca; and 4 developed regons: Europe, Norh Amerca, Pacfc and AEFE (Europe, Ausralasa and Far-Eas)), as well as a value weghed world marke ndex. The sample covers he perod from January 1988 o Sepember 01. All he ndces are obaned from Morgan Sanley Capal Inernaonal (MSCI) and nclude boh capal gans and dvdend yelds. Reurns are compued n excess of he 30-day Eurodollar depos rae obaned from DaaSream and expressed n Amercan dollar. Descrpve sascs for he excess reurns are repored n Table 1. Table 1 reveals a number of neresng facs. Frsly, he relave behavor of emergng regon marke reurns s smlar o ha repored n pas leraure: volaly s hgh, bu reurns are no necessary large. Lan Amerca has he hghes reurns and Pacfc he lowes ones. Lan Amerca has he hghes rsk and Norh Amerca he lowes one. Secondly, he Bera-Jarque es sasc srongly reecs he hypohess of normally dsrbued reurns, whch suppors our decson o use QML o esmae and 9

11 es he model. Moreover, here s some evdence of reurn predcably usng prevous excess reurns n emergng marke regons. Fnally, he ARCH es shows sgnfcan ARCH effecs n mos cases. 3.- Emprcal resuls We proceed n hree seps. Frs, we presen he model esmaes and compue some specfcaon ess. Second, we analyse he mpled segmenaon degrees. Fnally, we examne he conrbuon of regonal rsk o oal rsk premum. Model esmaon Snce heory predcs ha he world prce of rsk should be he same for each regon (Harvey, 1991), we proceed n wo seps. Frsly, we esmae he world equaon of he sysem (10). Ths provdes us wh esmaes of he world prce of rsk and of he coeffcens of he me-varyng world varance. We hen mpose hese esmaes n he regon esmaons of sysem (10). Ths sraegy s also used by Bekaer and Harvey (1995), Hardouvels e al. (006), Carrer e al. (007) and Arour e al. (01) who noe ha a wo-sep procedure has he drawback of ncludng samplng error from he frs sep bu s more n lne wh he heory and produces more powerful ess. Resuls are summarzed n Table. World marke resuls Panel A of Table repors he resuls for he world marke porfolo. The sysem esmaed s he followng: R h w r h c a w 1 b h 1 / 1 ~ 0, h (11) Meron (1980) and Adler and Dumas (1983) show he prce of world marke rsk o be equal o he world aggregae rsk averson coeffcen. Snce mos nvesors are rsk averse, he prce of rsk mus be posve. Our esmaon resuls show ha he average prce of world marke rsk s equal o.85 and s sgnfcan, whch s conssen wh he fndngs of earler sudes. Moreover, here s srong evdence ha he world marke varance dynamcs follow a GARCH process. The sandardzed resduals show no 10

12 sgnfcan auocorrelaons and he ARCH effec presen n world marke reurns has been suffcenly capured by he model. Regon per regon resuls Panel B of Table conans regon per regon parameer esmaes and a number of dagnosc ess for our model. The ARCH and GARCH coeffcens are sgnfcan for all regons. Ths s n lne wh prevous resuls n he leraure. The coeffcens a are relavely small, whch ndcaes ha condonal volaly does no change very rapdly. However, he coeffcens b are large, ndcang gradual flucuaons over me. Dagnoscs of sandardzed resduals 3 show ha all ndces of kuross and he Bera-Jarque sascs are mproved relave o he raw reurns of Table 1. The nonnormaly n he daa s hen reduced n all cases and he hypohess of normaly of resdual seres s acceped n 4 ou of 8 cases: EM Asa, EM Far Eas, AEFE and Norh Amerca. There are no ARCH effecs n he resdual seres for all regons no resdual auocorrelaons n mos cases. Therefore, he performed esmaon suffcenly elmnaed he non-normaly and auocorrelaon observed n he daa. Taken ogeher, our resuls sugges ha he specfcaon we use s flexble enough o capure he dynamcs of he condonal frs and second momens. Segmenaon analyss Panel A of Table 3 conans nformaon regardng he esmaed degrees of segmenaon from he prevous model repored n Table. The degree of segmenaon should be zero under complee negraon and ncreases wh segmenaon. As mos emergng regons have known an ncreasng lberalzaon movemen snce he end of nnees (Bekaer e al., 00, 003, 005), we repor sascs on he esmaed segmenaon degrees for he enre perod as well as for wo subperods: 1988: :1 & 000:01-01:09. Over he enre perod, he degrees of segmenaon vary from 0.04 for AEFE o 0.39 for EM Europe. As expeced, emergng marke regons are clearly more segmened form he world marke han developed marke regons. Among developed regons, Pacfc s he mos segmened wh a degree of segmenaon of s In he mulvarae framework, he on sandardzed resduals are gven by H. 1 11

13 Over he subperod 1988: :1, he esmaed degrees of segmenaon are hgh n mos cases and range from 0.46 (EM Far Eas) o 0.64 (EM Europe) for emergng marke regons and from 0.06 (AEFE) o 0.3 (Norh Amerca) o developed regons. Over he second subperod 000:01-01:09, all suded regons have become less segmened no he world marke. Ths resul corroboraes our apror expecaons based on he gradual lfng of foregn ownershp resrcons, general lberalzaon of capal markes, ncreased avalably of ADRs and counry funds, beer nformaon and nvesor awareness. Lan Amerca becomes he mos negraed emergng regon wh an esmaed degree of segmenaon of only The esmaed degree of segmenaon decreases o 0.0 for EM Asa and EM Europe and 0.1 for EM Far-Eas. As for he suded developed marke regons, he esmaed degrees of segmenaon are very weak over hs sub-perod excep for Pacfc (0.16). Overall, our fndngs are close o hose obaned by Gerard e al. (003) and Chelley-Seeley (004) for Asan emergng markes, Barar (004) for Lan Amercan markes, Voronkova (004) for European emergng markes, and Aggarwal and Kyaw (005) for he NAFTA regon. Rsk Premum Analyss We have shown ha mos regons are no compleely negraed no he world marke. Thus, regonal rsk plays a sascally sgnfcan role n deermnng he equlbrum value of asse reurns, especally n emergng marke regons. In hs subsecon, we assess he economc mporance of he premum assocaed wh regonal rsk facors. To hs end, we decompose he oal premum no wo rsk premums: global and regonal: Toal premum: TP h w h Global premum: GP h w Regonal premum: RP h 1 Panel B of Table 3 summarzed he obaned resuls. Emergng marke regons show sgnfcanly hgher esmaed rsk prema han developed marke regons. Over he enre perod, he annualzed esmaed oal rsk prema range from 6.9% (AEFE) o 1

14 15.51% (Lan Amerca). Regonal rsk premum s he mos mporan componen of oal rsk premum n all emergng markes regons whle s conrbuon o oal prema s weak for developed marke regons. The mporance of he regonal premum vares from a regon o anoher dependng on s degree of segmenaon and he quany of s rsk undversfable nernaonally. Toal rsk prema n developed regons are essenally deermned by he world marke rsk as expeced gven her low levels of segmenaon. When we he compare he subperods 1988: :1 and 000:01-01:09, one sees ha he role of regonal rsk facors n deermnng oal rsk prema remans mporan bu has sgnfcanly decreased. Ths resul s expeced because we have shown ha segmenaon has decreased for all suded regons. Thus, a he end of our sample global premum sared o play a more sgnfcan role n he oal rsk premum for all suded regons and s wegh as percenages of he absolue oal prema have ncreased. These resuls sugges ha global facors are playng an ncreasng role n prcng emergng marke regons. However, here are some mporan cross-regon varaons n he relave sze and dynamcs of global versus local rsk prema. To sum up, our fndngs sugges ha because of marke segmenaon, he rsk premum assocaed wh he regonal rsk undversfable nernaonally s a sascally and economcally sgnfcan componen of he oal rsk premum for all he emergng marke regons we sudy. In mos cases, he relave mporance of hs rsk premum has decreased n recen years. The well negraed marke regons dffer from emergng marke regons n wo maor respecs: he oal rsk premums are sgnfcanly smaller and domnaed by global facors and nernaonal evens. 4- Concluson In hs arcle, we developed a capal asse prcng model n order o assess sock segmenaon and s effecs on rsk prema a he regonal level. We assume smply ha some global nvesors from dfferen regons do no wan and/or canno have access o foregn asses as a resul of explc and/or mplc barrers on nflows and/or ouflows, a suaon ha may make sock markes parally segmened. We derve a general model ha enables us o prce asses n dynamc nermedae marke srucures where markes are no n he exreme saes of perfec negraon or complee segmenaon. We use a mulvarae GARCH-n-Mean specfcaon o apply hs model for egh regons: 4 13

15 emergng marke regons and 4 developed marke regons over he perod 1988:01-01:09. Our man fndngs show ha he degree of sock marke segmenaon changes over me and ha mos suded marke regons have become less segmened n he recen perod as a resul of lberalzaon and reforms. Our resuls also show ha because of marke segmenaon, he rsk premum assocaed wh he regonal resdual rsk undversfable nernaonally s he mos sascally and economcally sgnfcan componen of he oal rsk premum for all he suded emergng marke regons and ha he oal rsk premum reflecs manly regonal evens. However, he share of he premum assocaed wh global facors has ncreased n recen years ndcang a hgher degree of marke negraon and hgher sensvy o world evens. By comparson wh emergng marke regons, he developed regons we sudy have four man dssmlares: he oal rsk premums are sgnfcanly smaller, less volale, domnaed by global facors and reflec mosly nernaonal evens. 14

16 REFERENCES Adler M. and B. Dumas (1983), Inernaonal Porfolo Selecon and Corporaon Fnance: A Synhess, Journal of Fnance, n 38, pp Adler M. and Q R. (003), Mexco s Inegraon no he Norh Amercan Capal Marke, Emergng Economc Revew, 4, pp Aggarwal R., and N. A. Kyaw (005), Equy marke negraon n he NAFTA regon: Evdence from un roo and conegraon ess, Inernaonal Revew of Fnancal Analyss, 14(4), pp Arour, M., Nguyen, D.K., Pukhuanhong, K., 01. An nernaonal CAPM for parally negraed markes: Theory and emprcal evdence. Journal of Bankng and Fnance 36, Arour, M. E.-H. and Nguyen, D. K.. (010). Tme-Varyng Characerscs of Cross-Marke Lnkages wh Empercal Applcaon o Gulf Sock Markes. Manageral Fnance, 36(1), Arour M., Dnh TH., and Nguyen DK. (010), Tme-varyng Predcably n Crude Ol Markes: The Case of GCC Counres, Energy Polcy, Vol. 38, No. 8, pp , 010. Barar M. (004), Equy marke negraon n Lan Amerca: A me-varyng negraon score analyss, Inernaonal Revew of Fnancal Analyss, 13(5), pp Bekaer G, Harvey C. R and Lunsdane (003), Dang he Inegraon of World Equy Markes, Journal of Fnancal Economcs, 65 (), pp Bekaer G. and C. Harvey (1995), Tme Varyng World Marke Inegraon, Journal of Fnance, 50(), pp Bekaer G. and Harvey C. (003), Emergng Markes Fnance, Journal of Emprcal Fnance, 10, pp Bekaer G., Harvey C. and LUMSDAINE R. (00), The Dynamcs of Emergng Marke equy Flows, Journal of Inernaonal money and Fnance, 1 :3, pp Bekaer G., Harvey C. and Ng A. (005), Marke Inegraon and Conagon, Journal of Busness, vol. 78, pp Black F. (1974), Inernaonal Capal Marke Equlbrum wh Invesmen Barrers, Journal of Fnancal Economcs, 1, pp Bollerslev T. and Wooldrge J.M. (199), Quas-maxmum Lkelhood Esmaon and Inference n Dynamc Models wh Tme-Varyng Covarances, Economerc Revew, n 11, pp Carrer F., Errunza V. and Hogan K. (007), Characerzng World Marke Inegraon Through Tme, Journal of Fnancal and Quanave Analyss, 4, Chelley-Seeley P. (004), Equy marke negraon n he Asa-Pacfc regon: A smooh ranson analyss, Inernaonal Revew of Fnancal Analyss, 13(5), pp

17 Cooper I. and Kaplans E. (000), Parally Segmened Inernaonal Capal Marke Inegraon Budgeng, Journal of Inernaonal Money and Fnance, 43, pp De Sans G. and Gerard B. (1997), Inernaonal Asse Prcng and Porfolo Dversfcaon wh Tme-Varyng Rsk, Journal of Fnance 5, pp Dng Z. and R. Engle (1994), Large Scale Condonal Covarances Marx Modellng, Esmaon and Tesng, Workng Paper, Unversy of Calforna a San Dego. Eunza V. and Losq E. (1985), Inernaonal Asse Prcng under Mld Segmenaon: Theory and Tes, Journal of Fnance 40,pp Gerard B., K. Thanyalakpark and J. Baen (003), Are he Eas Asan Markes Inegraed? Evdence from he ICAPM, Journal of Economcs and Busness, 55, pp Gupa R., and Gud F. (01), Conegraon relaonshp and me varyng comovemens among Indan and Asan developed sock markes, Inernaonal Revew of Fnancal Analyss, 1, pp Hardouvels G., Mallaropoulos G. and D. Presley (006), EMU and Sock Marke Inegraon, Journal of Busness, vol. 79, pp Harvey C (1991), The World Prce of Covarance Rsk, Journal of Fnance, vol 46(1), pp Karolya A. and R. Sulz, (00), Are Fnancal Asses Prced Locally or Globally?, n Handbook of he Economcs of Fnance, Consanndes, Harrs and Sulz edons, Norh-Holland. Kearney C., and Lucey B. M. (004), Inernaonal equy marke negraon: Theory, evdence and mplcaons, Inernaonal Revew of Fnancal Analyss, 13(5), pp Lucey B. M., and C. Muckley (011), Robus global sock marke nerdependences, Inernaonal Revew of Fnancal Analyss, 0(4), pp Meron R. (1980), On esmang he Expeced Reurn on he Marke: An Explonary Invesgaon, Journal of Fnancal Economcs, 8(4), pp Ross S. A. (1976), The Arbrage Theory of capal Asse Prcng, Journal of Economc Theory, n 4, pp Sharpe W. (1964), Capal Asse Prces: A Theory of Marke Equlbrum under Condons of Rsk, Journal of Fnance, n 9, pp Solnk B. (1983), Inernaonal Arbrage Prcng Theory, Journal of Fnance, 38, pp Sulz R. (1981), A Model of Inernaonal Asse Prcng, Journal of Fnancal Economcs, n 9, p Sulz R. (1999), Inernaonal Porfolo Flows and Secury Markes, n Marn Feldsen, Ed. Inernaonal Capal Flows, Unversy of Chcago Press. 16

18 Voronkova S. (004), Equy marke negraon n Cenral European emergng markes: A conegraon analyss wh shfng regmes, Inernaonal Revew of Fnancal Analyss, 13(5), pp Table1: Descrpve sascs of regon excess reurns Annualzed monhly equy reurns are n US dollar and compued n excess of he 30-day euro-dollar depos rae. The sample covers he perod January 1988 Sepember 01. B-J s he Bera-Jarque es for normaly based on excess skewness and Kuross. Q(6) s he Lung-Box es for auocorrelaon of order 6 for he reurns and ARCH(6) s he ARCH es of order 6. EM Asa EM EM Far EM Lan AEFE Europe Norh Pacfc World Europe Eas Amerca Amerca Mean Sd. Dev Skewness Kuross B-J 6.434* * 7.751* 197.5* 37.07* 66.55* 65.90* 8.36** 65.99* Q(6) 4.001* ** 1.350* ARCH(6) 4.567* * 1.903** 6.499* * 5.5* 3.80* 5.809* *, ** and *** denoe sascal sgnfcance a 1%, 5% and 10%.. 17

19 Table : Quas-maxmum lkelhood esmaes of he model Panel A repors resuls for he world marke model. The model esmaed s: R h w r h c a w 1 b h 1 / 1 ~ 0, h Panel B repors resuls for he esmaon regon per regon. The esmaed model s: where q D H hn * hn / hnn, and R denoes he 1 R r 1 h H c C C aa * c vecor ha ncludes 1 * q 1 1 bb * H / 1 1 ~ 0, c rsky asses and he world marke porfolo. s he c c condonal covarance marx of asse reurns, h N s h he condonal varance of he world marke porfolo. s he he N h column of composed of he condonal covarance of each regon wh he marke porfolo and NN c 1 vecor of degrees of segmenaon, q s he c 1 vecor on undversfable regonal rsk, D H he dagonal componens n and * denoes he Hadamard marx produc. C s a c c lower rangular marx and a and b are c 1 parameer vecors. 1 s he rue non observable se of nformaon varables avalable a (-1). Esmaes are based on annualsed monhly reurns expressed n US dollar. Equy reurns are compued n excess of he 30-day euro-dollar depos rae. The sample covers he perod January 1988 Sepember 01 The models are esmaed by Quas-Maxmum Lkelhood n wo sages. We esmae frs he equaon for he world ndex reurns (Panel A) and hen mpose he esmaes of he world prce of rsk and he world varance coeffcens n each regon esmaons (Panel B). B-J s he Bera-Jarque es for normaly based on excess skewness and Kuross. Q(6) s he Lung-Box es for auocorrelaon of order 6 for he reurns and ARCH(6) s he ARCH es of order 6. Panel A: Esmaon resuls for he world marke World prce of rsk.854** (0.013) GARCH process World c 1.306** (0.617) a 0.13* (0.03) b 0.807* (0.060) 18

20 Resdual dagnoscs World Skewness Kuross J.B * Q(6).456 ARCH(6) Panel B: Esmaon resuls regon per regon GARCH process EM Asa EM Europe EM Far Eas EM Lan Amerca a 0.381* 0.154* 0.9* 0.117* (0.16) b 0.395** (0.168) (0.051) 0.770* (0.083) (0.07) 0.704* (0.081) (0.03) 0.845* (0.041) AEFE Europe Norh Amerca Pacfc 0.064** (0.036) 0.90* (0.058) 0.154* (0.051) 0.770* (0.083) 0.043* (0.017) 0.944* (0.078) 0.39* (0.07) (0.4) Resdual dagnoscs EM Asa EM Europe EM Far Eas EM Lan Amerca AEFE Europe Norh Amerca Pacfc Skewness Kuross J.B * * * * Q(6) 1.065* * ARCH(6) *, ** and *** denoe sascal sgnfcance a 1%, 5% and 10%.Sandard devaons are n parenheses. 19

21 Table 3: Esmaed degrees of segmenaon and rsk prema analyss Panel A conans sascs for he segmenaon degrees esmaed from he model n Table. The overall and subperod means and sandard devaons are repored. Panel B conans averages n percen for he annualsed rsk premums esmaed for he model n Table. The oal rsk premum (TP), he global premum (GP) and he local premum (LP) are measured as follows: TP GP h w h w RP 1 h h Panel A: Sascs for degrees of segmenaon EM Asa EM Europe EM Far Eas EM Lan Amerca AEFE Europe Norh Amerca Pacfc Overall mean 0.314** (0.13) 0.389* (0.11) 0.35* (0.089) 0.378* (0.073) (0.03) 0.081*** (0.048) 0.10 (0.070) 0.190* (0.06) Before * (0.11) 0.637* (0.098) 0.459* (0.109) 0.585* (0.154) (0.041) 0.147*** (0.081) 0.5** (0.110) 0.169** (0.085) Afer ** (0.078) 0.198** (0.085) 0.05* (0.069) 0.155** (0.074) 0.034*** (0.019) 0.04*** (0.05) 0.05 (0.510) 0.163** (0.096) Panel B: Analyss of rsk prema TP GP RP TP GP RP TP GP RP All sample Before December 000 Afer December 000 EM Asa 11,3* 5,341* 5,891* 10,756* 3,755* 7,001* 1,053* 6,38* 5,671* EM Europe 1,350* 4,37* 8,03* 13,04*,86* 10,16* 11,630* 4,487* 7,143* EM Far Eas 1,516* 5,735* 6,781* 14,375* 3,831* 10,544* 10,856* 5,633* 5,* EM Lan 15,511* 4,407* 11,104* 15,55* 3,531* 11,994* 15,4* 8,073* 7,350* Amerca AEFE 6,89* 5,896* 0,394 5,846* 5,80* 0,565 7,39* 6,304* 1,05*** Europe 6,61* 5,856* 0,756*** 6,016* 5,379* 0,637** 7,367* 6,* 1,145** Norh Amerca 6,38* 5,76* 0,656 5,68* 5,048* 0,580** 7,164* 6,559* 0,605 Pacfc 8,559* 6,307*,5** 7,947* 5,883*,063* 8,768* 5,96*,841** *, ** and *** denoe sascal sgnfcance a he 1%, 5% and 10%. Sandard devaons and daes are n parenheses. 0

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