Integration of emerging equity markets. A systematic review
Emerging equity markets have attracted foreign investor by their higher returns and prospect ofsuperior risk diversification benefits. In light of increasing flow of equity portfolio investmentsinto these economies and their subsequent integration with equity markets of developed world,studies have not only shown concern over the reduction in the long term risk diversificationbenefits, but also there may be less of increase in the original price of securities. Local economyinitiates formal financial liberalisation measures to integrate with world capital markets.However, removal of regulatory restrictions may not attract foreign investments in the presenceof other indirect barriers and emerging markets specific risks. Also, the process of financialliberalisation is time varying and not one off event. This creates difficulty in pin pointing theexact date of liberalisation. These complexities cause difficulties in the development of dynamicmodels for pricing securities in emerging markets and measuring the impact of integration.However, with the removal of direct and indirect barriers to foreign investments, these marketsare showing greater integration with world markets. With increasing integration emergingmarkets are becoming more susceptible to global risk factors. Higher degree of integrationshould reduce cost of equity capital (expected return) and increase the correlation of returns withdeveloped markets. However, empirical works report the reduction in cost of capital to be lowerthan predicted by asset pricing models. It is also challenging to measure the degree of marketintegration because of the constant structural changes observed in emerging markets. Countrieshave even been found to exhibit segmentation over time. Hence, in the context of asset pricingmodels the findings on the degree of integration are inconclusive and conflicting.
Year of publication: |
2007-08
|
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Authors: | Thapa, Chandra |
Other Persons: | Poshakwale, Sunil (contributor) |
Publisher: |
Cranfield University |
Saved in:
freely available
Saved in favorites
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