Market Integration and Currency Risk in Asian Emerging Markets

Research in International Business and Finance, Volume 21, Issue 1, Pages 98-117, 2007

Posted: 28 Feb 2021

See all articles by Chu-Sheng Tai

Chu-Sheng Tai

Texas Southern University - Department of Accounting and Finance

Date Written: January 2, 2007

Abstract

Most of the Asian emerging stock markets started to liberalize their markets in 1990s. In this paper, I examine whether those markets have become integrated with world stock market since the 1990s by estimating and testing a dynamic version of international CAPM (ICAPM) in the absence of purchasing power parity (PPP) using a parsimonious multivariate GARCH-in-Mean (MGARCH-M) approach. I also investigate to what extent the liberalization process has affected the cost of capital and price volatility for each market. The empirical results show that Philippines was segmented from the world stock market before its liberalization date, but no evidence of market segmentation is found for the other five markets (India, Korea, Malaysia, Taiwan, and Thailand) before their liberalization dates. However, all six markets have become integrated after opening up their markets to foreign investors. In addition, the estimated risk premia are lower after the liberalization, indicating that the liberalization process has reduced the cost of capital for their domestic firms. Moreover, there is no evidence of extra market volatility introduced by capital market liberalization, and on the contrary, the markets have become more stabilized through the liberalization process.

Keywords: Market integration, Currency risk, Asset pricing, Multivariate GARCH-M

JEL Classification: C32, G12, G15

Suggested Citation

Tai, Chu-Sheng, Market Integration and Currency Risk in Asian Emerging Markets (January 2, 2007). Research in International Business and Finance, Volume 21, Issue 1, Pages 98-117, 2007, Available at SSRN: https://ssrn.com/abstract=3758648

Chu-Sheng Tai (Contact Author)

Texas Southern University - Department of Accounting and Finance ( email )

United States

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