An International CAPM for Partially Integrated Markets: Theory and Empirical Evidence

49 Pages Posted: 21 Mar 2011 Last revised: 5 Feb 2019

See all articles by Mohamed Arouri

Mohamed Arouri

Université Côte d'Azur

Duc Khuong Nguyen

IPAG Business School

Kuntara Pukthuanthong

University of Missouri, Columbia

Multiple version iconThere are 2 versions of this paper

Date Written: March 15, 2011

Abstract

This article proposes a theoretical testable ICAPM for partially segmented markets. We establish that if some investors do not hold all international assets because of implicit and/or explicit segmentation factors, the world market portfolio is not efficient and the classic ICAPM must be augmented by a new factor reflecting the local risk undiversifiable internationally. We test this model empirically using a multivariate GARCH-in-mean methodology and non-linear models for Asian and Latin American emerging markets. Our findings show that the degree of stock market segmentation is time-varying and that the premium associated with the domestic risk is the most important component of the total risk premium. However, our results also show that most of the emerging markets we study have become more integrated as a result of liberalization and reforms and that the relative magnitude of the premium associated with global factors has increased in recent years.

Keywords: international Asset Pricing, Segmentation, Emerging Markets, Multivariate GARCH

JEL Classification: G15, F36, C32

Suggested Citation

Arouri, Mohamed and Nguyen, Duc Khuong and Pukthuanthong, Kuntara, An International CAPM for Partially Integrated Markets: Theory and Empirical Evidence (March 15, 2011). Available at SSRN: https://ssrn.com/abstract=1787417 or http://dx.doi.org/10.2139/ssrn.1787417

Mohamed Arouri

Université Côte d'Azur ( email )

France

Duc Khuong Nguyen (Contact Author)

IPAG Business School ( email )

184 BD Saint Germain
Paris, 75006
France

HOME PAGE: http://www.ipag.fr/en/

Kuntara Pukthuanthong

University of Missouri, Columbia ( email )

Robert J. Trulaske, Sr. College of Business
403 Cornell Hall
Columbia, MO 65211
United States
6198076124 (Phone)

HOME PAGE: http://https://kuntara.weebly.com

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