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

54 Pages Posted: 23 Dec 2012

See all articles by Mohamed El Hedi Arouri

Mohamed El Hedi Arouri

EDHEC Business School

Duc Khuong Nguyen

IPAG Business School

Kuntara Pukthuanthong

University of Missouri, Columbia

Date Written: December 23, 2012

Abstract

This article proposes a theoretical testable capital asset pricing model for partially segmented markets. We establish that if some investors do not hold all international assets because of direct and/or indirect barriers, the world market portfolio is not efficient and the traditional international CAPM must be augmented by a new factor reflecting the local risk undiversifiable internationally. We also introduce a suitable framework to test this model empirically. Using a sample of six emerging markets and three mature markets, we find that the degree of stock market integration varies through time and that most of the sample emerging markets have become more integrated in the recent years. The local risk premium for emerging markets represents the most important component of the total risk premium, but its relative importance has increased recently. Differently, the total risk premium for developed countries is largely driven by global factors.

Keywords: ICAPM, integration, emerging markets, multivariate GARCH

JEL Classification: F36, G15

Suggested Citation

Arouri, Mohamed El Hedi and Nguyen, Duc Khuong and Pukthuanthong, Kuntara, An International CAPM for Partially Integrated Markets: Theory and Empirical Evidence (December 23, 2012). Journal of Banking and Finance, Vol. 36, No. 9, 2012, Available at SSRN: https://ssrn.com/abstract=2193154 or http://dx.doi.org/10.2139/ssrn.2193154

Mohamed El Hedi Arouri

EDHEC Business School ( email )

58 rue du Port
Lille, 59046
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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