Dating the Integration of World Equity Markets
Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)
Campbell R. Harvey
Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER)
Robin L. Lumsdaine
American University - Department of Finance and Real Estate; National Bureau of Economic Research (NBER)
September 2, 2001
EFA 2001 Barcelona Meetings
Measuring the integration of world capital markets is notoriously difficult. For example, regulatory changes which appear comprehensive may have little impact on the functioning of the capital market if they fail to lead to foreign portfolio inflows. In contrast to the usual practice of documenting the timing of regulatory changes, we specify a reduced-form model for a number of financial time-series (for example, equity returns and dividend yields) and search for a common break in the process generating the data. In addition, we estimate a confidence interval for the break. Information on a variety of financial and macroeconomic indicators is employed to interpret the results and to identify the likely date the equity market becomes financially integrated with world capital markets. We find endogenous break dates that are very accurately estimated but do not always correspond closely to dates of official capital market reforms. After the break, stock markets are on average larger and more liquid than before; returns are more volatile and more highly correlated with the world market return, dividend yields are lower and credit ratings improve.
Number of Pages in PDF File: 61
JEL Classification: F3,G1
Date posted: October 6, 2001
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