Equity Market Risk Premium and Global Integration

12 Pages Posted: 7 Aug 2009

See all articles by Robert Johnson

Robert Johnson

University of San Diego - School of Business Administration

Luc Soenen

Harvard University; Tilburg University; CENTRUM

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Abstract

The equity market risk premium remains one of the most debated issues in corporate finance. Monthly returns for 19 developed equity markets and 16 emerging equity markets between 1970 and 2006 aided in examining the extent of integration of these markets with the U.S. stock market and the Morgan Stanley Capital International (MSCI) World Index. Geweke measures of feedback indicate that although both developed and emerging markets show a slight and gradual increase in integration, emerging markets reflect significant segmentation from the U.S. stock market and the world market index. Greater stock market integration is associated with a more favorable economic and political climate toward business. Additional risk premiums relative to the intertemporal capital asset pricing model (ICAPM) arise because of segmentation of emerging markets from the world. Valuing business investments in countries with at least partially segmented equity markets requires an adjusted capital asset pricing model (CAPM).

Keywords: equity market risk premium, international stock market integration, emerging capital markets

Suggested Citation

Johnson, Robert and Soenen, Luc, Equity Market Risk Premium and Global Integration. Journal of CENTRUM Cathedra, Vol. 2, No. 1, 2009. Available at SSRN: https://ssrn.com/abstract=1444074

Robert Johnson (Contact Author)

University of San Diego - School of Business Administration ( email )

5998 Alcala Park
San Diego, CA 92110-2492
United States
619-260-4849 (Phone)

Luc Soenen

Harvard University ( email )

1875 Cambridge Street
Cambridge, MA 02138
United States

Tilburg University

P.O. Box 90153
Tilburg, DC 5000 LE
Netherlands

CENTRUM ( email )

Daniel Alomía Robles s/n
Los Alamos de Monterrico
Surco, Lima, Lima 00001
Peru

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