Tests of international capital market integration: evidence from emerging stock markets

Serra, A P (1999) Tests of international capital market integration: evidence from emerging stock markets. Doctoral thesis, University of London: London Business School.

Abstract

The central theme underlying my thesis is Emerging Stock Markets and my dissertation consists of three empirical essays regarding International Asset Pricing. I focus my research on emerging markets and stress how the new and extensive data provide additional insights on International Capital Market Integration and Portfolio Diversification issues. My first essay tests whether an International Asset Pricing theory can account for the time-series as well as cross-sectional variation in discounts. I use an extensive new data set on US, UK and off-shore emerging markets' country funds. I find that changes in discounts are significantly and positively correlated with the fund's exposure to the world market factor but I find no significance for the underlying assets' exposure to the local market factor. The evidence is also inconclusive regarding the effects of barriers to free investment. Overall, my results suggest that segmentation of capital markets is insufficient to explain the time-series and cross-sectional variation in country funds' discounts. My second essay examines how the dual-listing of emerging markets' stocks affects their valuation and studies the link between these effects and market segmentation. My empirical results are based on dual-listings of emerging markets' stocks on US and London exchanges. Firms experience significant positive abnormal returns before the listing date and a significant decline in returns over the first five weeks following listing. The valuation impact is similar across exchanges and more pronounced for emerging markets' firms. Overall, the results are consistent with the market segmentation hypothesis. My third essay analyses the influence of industrial factors on the cross-sectional variance and correlation structure of country index returns for the particular case of emerging markets. In addition, I investigate, for each market, the role of a set of a priori specified factors in the cross-section of stock returns, and assess whether those factors are common to the universe of emerging markets. My sample consists of all the individual stocks composing the IFC emerging markets' indices. Country effects are the most important factors driving the behaviour of emerging markets' individual stock returns. A finer industry partition shows, however, that ignoring the industrial mix will lead to an important loss of diversification benefits. Furthermore, my results indicate that the most important pricing factors are common to emerging markets. Yet the payoffs to these factors are uncorrelated. Altogether, the empirical results are consistent with market segmentation.