Global Market Integration Research Articles

Factor income taxation and growth with increasing integration of world capital markets

In a closed economy, the infinite-horizon and the overlapping generations (OG) model prescribe diametrically opposite policies on factor taxation: the former argues that the growth-maximizing capital income tax rate should be set to zero, whereas the latter argues that it should be set as high as possible. This note investigates the issue by taking into account global capital market integration. We show that the long-run growth-maximizing capital income tax rate in a small open OG economy is decreasing as the economy’s capital market is increasingly integrated with the rest of the world, and will be equal to zero as prescribed in the infinite-horizon model once the degree of integration becomes sufficiently high.

Bivariate Cointegration and Time Varying Co-Movements of MIST Equity Markets with the Developed Stock Markets of the World

In an effort to help global investors benefit from growth beyond the BRIC nations, a group of 11 nations (N11) that are likely to make increased contribution towards global GDP in the time to come were identified by Goldman Sachs. These nations include Mexico, Indonesia, South Korea, Turkey, Bangladesh, Egypt, Nigeria, Pakistan, Philippines, Vietnam, and Iran. Of the 11 nations, the economies of Mexico, Indonesia, South Korea, and Turkey (collectively called as MIST economies) account for 73% of the total N-11 GDP as of 2011. Taking cognizance of the emergence of N11 economies from the shadows of the BRICs, the prominent role played by the MIST economies amidst N11 group, and the growing expectation that these economies would serve as the growth engines of the world in the time to come, it is all the more critical for international investors looking for international portfolio diversification avenues to understand the extent of integration between the equity markets pertaining to the MIST economies and the developed stock markets of the world. Consequently, this study is aimed at examining the extent of bivariate cointegration and time varying comovements of equity markets pertaining to MIST economies with the developed stock markets of the world namely US, UK, Germany, Japan, Hong Kong, and Singapore. The author employs Engle-Granger two-step cointegration test (Engle and Granger, 1987), Gregory-Hansen test (Gregory, and Hansen, 1996), Bai Perron test (Bai and Perron, 1998, 2003) and Johansen’s cointegration test (Johansen, 1988, 1991) to test for bivariate cointegration between each of the stock markets pertaining to MIST economies and the developed markets. Further, the estimated residuals from the Bai-Perron test are then utilized to construct an error correction model, wherein the error correction parameter measures the speed of adjustment of the bivariate system to disequilibriating shocks. Such an error correction model is viewed as a more powerful test for cointegration than cointegration tests based on static cointegration regressions (Banerjee et al., 1990; Kremers et al., 1992). In addition, multivariate Johansen cointegration test is also employed to examine extent of integration of each of the MIST equity markets with all of the developed stock markets considered for this study. In an effort to examine short-term dynamics between MIST and developed equity markets, Granger causality methodology (Granger, 1969) was employed. Further bivariate DCC-GARCH models (Engle, 2002) are employed to examine the time varying co-movements of equity markets pertaining to the MIST economies with the developed stock markets of the world. The findings pertaining to this study would not only be valuable to investing community, but would also go a long way in contributing towards the vast burgeoning literature on global stock market integration and its implications for international portfolio diversification. Finally, this is possibly the first study that tests for cointegration of stock markets pertaining to the MIST economies with developed world equity markets, since the author is yet to come across such a study.

Nowhere Left to Hide? Stock Market Correlation, Regional Diversification, and the Case for Investing in Africa

Investors diversify their portfolios to boost returns and manage risk. However, the benefits of diversifying across geographic regions are reduced if markets are highly correlated. This paper examines trends over the past two decades and finds, as expected from global market integration, that regional indices have become increasingly correlated with the S&P 500 index. Sub-Saharan Africa is also part of this trend, but is a notable laggard. For instance, in 2010 the correlation with the S&P500 was 0.86 for markets in Latin America, 0.79 for Asia, and just 0.31 for sub-Saharan markets (excluding South Africa). Additionally, correlations among African markets are generally very low. While there remain barriers to exploiting this trend, Africa’s integration lag may present opportunities for investors seeking regional diversification — and policymakers seeking to attract greater portfolio investment to the continent.

The Value Impact of Stock Liquidity: An International Evidence

This study addresses an important issue about the role of stock market in corporate finance by directly examining the effect of stock liquidity on firm value on a broad sample of firms from 53 countries for the period 1981-2010. Consistent with finance theory, we document a strong positive association between stock liquidity and firm value at both the firm and country levels. This finding is robust to alternative stock liquidity measures and is not driven by the endogeneity problem. We further explore how country characteristics on investor protection affect the value impact of liquidity. The results show that strong investor protection and transparent financial reporting environments magnify the importance of stock liquidity to firm value. However, global market integration weakens the effects of local country's investor protection regimes.

The Right to Development: Reframing a New Discourse for the Twenty-First Century

Since its adoption in 1986 the Declaration on the Right to Development has been mired in academic and political controversies, and has had little impact. Yet it was an important innovation that takes international human rights in addressing injustices in the operations of the global economy that impinge human rights, especially in developing countries. The concept is particularly relevant to the twenty first century challenges as global market integration continues to proceed. The paper argues that the failure of RTD to gain momentum is due not only to ideological capture by states but by lack of civil society mobilization. A new discourse on this right is needed for the concept to fulfill its potential in bringing human rights principles into the governance of the global economy. Such discourse should focus on three areas of global economic systems: resource flows, volatility of global markets and asymmetrics of power in multilateral rule making.

Crude Oil Market Power—A Shift in Recent Years?

We investigate the exertion of market power in the global crude oil market over the past years. Recognizing the difficulty of identifying market power in the crude oil market by empirical studies, we propose a numerical partial equilibrium model formulated as a mixed complementarity problem. Our approach allows for strategic behavior in a Nash-Cournot market, a Stackelberg leader-follower game, an OPEC oligopoly or cartel, as well as perfect competition. To take account of liquid spot markets, the model specifically includes arbitragers to capture the effect of global crude oil market integration. Our results indicate a market structure shift over the past years. Reported quantities and prices before the 2008 turmoil are close to those derived from a Stackelberg market simulation, with Saudi Arabia acting as Stackelberg leader vis-a-vis a non-cooperative OPEC oligopoly and a competitive fringe. However, in 2008 and 2009, observed prices are closer to the competitive benchmark. We conclude that OPEC suppliers’ ability to exert market power was reduced in the 2008 turmoil and its aftermath.

Dynamics of Network of Global Stock Markets

This paper studies the co-movement pattern of 67 stock market indices in the past 5 years. In order to capture the complex interaction of the stock markets, we propose a network approach to analyze the interdependence of the individual stock markets. Specifically, stock markets are considered as network nodes, and the network links (weights of links) are defined by the dynamic conditional correlation between market indices. We reveal the structure dynamics of global stock market integration by examining the variation of the network parameters as time elapses. We show that global stock markets have time-varying synchronization, and that developed markets tend to demonstrate stronger integration while emerging markets are statistically independent of each other. Furthermore, we show that stock markets of different countries generally behave in a synchronous manner when they experience fluctuation. This volatility spillover or financial contagion phenomenon is especially notable in the frontier markets. Our work exposes the interdependence of stock markets in the world and proposes a network approach to identifying some salient global behavior of the interconnecting markets.

Global Financial Crisis and Stock Market Integration: A Study on the Impact of Global Financial Crisis on the Level of Financial Integration between the US and Indian Stock Markets

This article, using the daily returns of the indices of US (S&P 500) and the Indian stock markets (CNX S&P Nifty), examines the impact of the global financial crisis on the level of financial integration between the US and Indian stock markets from March 2005 to November 2010. The article also analyses the existence of cointegration and dynamic relationship between the two indices during the pre-crisis, crisis and post-crisis periods, and in the last five years, using the Johansen Cointegration analysis and the Vector Auto Regression (VAR) Model. The article finds no cointegration between the two indices in all the four periods. The returns from the Indian stock market with reference to the previous day’s return of the US stock market show a lot of feedback effect from the US to India, whereas the returns from the US stock market show no significant reaction. However, in terms of its own past, there is a strong negative reaction due to the overreaction or mean reversion of the stock market during the post-crisis period.

The impact of terrorism on global equity market integration

In this paper we investigate the short-term contagion and long-term integration effects of terrorist activity on national stock markets. Using the partially integrated model of Bekaert et al. (Bekaert G, Harvey C and Ng A (2005) Market integration and contagion. Journal of Business 78: 39–69), we examine whether changes in cross-border relationships surrounding recent terrorist events are caused by changes in exposure to common risk factors and investigate whether these findings are similar across both developed and emerging market securities. Our research concludes that terrorism induces substantial contagion and market integration effects on national equity markets. Specifically, we provide strong evidence that major terrorist attacks induce substantial contagion consequences, particularly for developed nation equity markets. In terms of longer-term integration effects, a strong increase in cross-market correlation is observed from the pre to post-9/11 period. However, we find little evidence of an increase in the risk exposures of national markets to common risk factors, suggesting that this heightened correlation is driven by an increase in global risk factor uncertainty. This finding is consistent with the argument that an increase in the risk aversion of market participants is associated with terrorist attacks.

Global Capitalism Theory and the Emergence of Transnational Elites

The class and social structure of developing nations has undergone profound transformation in recent decades as each nation has incorporated into an increasingly integrated global production and financial system. National elites have experienced a new fractionation. Emergent transnationally-oriented elites grounded in globalized circuits of accumulation compete with older nationally-oriented elites grounded in more protected and often state-guided national and regional circuits. Nationally-oriented elites are often dependent on the social reproduction of at least a portion of the popular and working classes for the reproduction of their own status, and therefore on local development processes however so defined, whereas transnationally-oriented elites are less dependent on such local social reproduction. The shift in dominant power relations from nationally- to transnationally-oriented elites is reflected in a concomitant shift to a discourse from one that defines development as national industrialization and expanded consumption to one that defines it in terms of global market integration.

The liability of foreignness in capital markets: Sources and remedies

The accelerating pace of global capital market integration has provided new opportunities for firms to raise capital abroad through global debt issues, cross-listings, and initial public offerings in foreign stock exchanges. However, existing empirical evidence suggests that foreign firms tend to be at a disadvantage compared with domestic firms, and they often suffer from investors’ “home bias”. The objective of this paper is to understand why firms are facing problems when accessing capital in foreign markets, and possible mechanisms that can help to mitigate these problems. It expands the liability of foreignness (LOF) research beyond the product market domain to include liabilities faced by firms attempting to secure resources in foreign capital markets. We identify key differences between product and capital markets related to information environment, time structure of transactions, and linkages between buyers and sellers. We analyze institutional distance, information asymmetry, unfamiliarity, and cultural differences as the main sources of capital market LOF (CMLOF). We suggest possible mechanisms that managers can employ to mitigate CMLOF and overcome investors’ “home bias”: bonding, signaling, organizational isomorphism, and reputational endorsements. We also outline directions for further theoretical and empirical development of the CMLOF research.

The Equity Risk Premium: Empirical Evidence from Emerging Markets

The analysis of the Equity Risk Premium (ERP) and the research e! orts aimed at solving the Equity Premium Puzzle (Mehra and Prescott 1985), are still widely discussed in the economic and financial literature. The purpose of this paper is to show that di! erences in the ERP between developed and emerging markets lead to many empirical asset pricing issues. Using data from both markets, we first provide an ex-post simple time series analysis on the ERP. Compared to developed markets, and in line with existing literature, we find that emerging markets compensate investors with higher returns. We observe that the time varying nature of the ERP in emerging economies, relates mainly to economic cycles, shocks and other macro phenomena (i.e. global financial market integration). Basic statistics also show that during the last decade the ERP shrunk, especially in advanced economies. To improve investigations on the higher emerging markets’ equity premium, a standard global asset pricing model is adopted. On one hand, we mainly find that the one-factor model does not fully predict emerging markets’ equity premia. On the other hand, we discover that the inclusion of liquidity conditions and time-varying components provides reasonable explainations for the behaviour of equity premia in these “young” markets. Our final findings mainly suggests that global business cycle and financial integration process are crucial in determining the risk associated to emerging markets’ investments.

The Growing Impact of Globalization for Health and Public Health Practice

In recent decades, public health policy and practice have been increasingly challenged by globalization, even as global financing for health has increased dramatically. This article discusses globalization and its health challenges from a vantage of political science, emphasizing increased global flows (of pathogens, information, trade, finance, and people) as driving, and driven by, global market integration. This integration requires a shift in public health thinking from a singular focus on international health (the higher disease burden in poor countries) to a more nuanced analysis of global health (in which health risks in both poor and rich countries are seen as having inherently global causes and consequences). Several globalization-related pathways to health exist, two key ones of which are described: globalized diseases and economic vulnerabilities. The article concludes with a call for national governments, especially those of wealthier nations, to take greater account of global health and its social determinants in all their foreign policies.

The Multilateral Trading System

This paper traces the evolution of the global trading system from the 19th century to the present-day GATT/WTO arrangements, calling attention to the key roles of reciprocity and non-discrimination and taking note of how the system is now challenged by the new paradigm of global market integration. The main features of the WTO are described, the boundaries of the WTO identified, and how the expansion of these boundaries may result in the over-extension and weakening of the effectiveness of the WTO.

The Effect Of IFRS Adoption On Global Market Integration

This paper examines the effect of the adoption of international financial accounting standards (IFRS) on global capital market integration, measure by correlation matrix of the stock market index returns. We investigate a sample of countries that have adopted IFRS as their accounting standards for listed companies. Our results are consistent with the suggestion that these markets will have a higher degree of integration among them after their IFRS adoption as compared to the period before the adoption.

Information dynamics effects from major world markets to SAARC nations

This paper investigates the impact of major world equity markets on four founding countries of the South Asian Association for Regional Cooperation (SAARC). With a population of 1.47 billion, SAARC is the largest regional organization in the world. However, the issue of global integration of equity markets of the SAARC nations has largely been ignored. This study fills this important gap, adding results towards the ongoing debate concerning the issue of global market integration. After the onset of the financial crises of 2008, this issue is imperative. VAR analysis is used to determine whether there is any dependency of SAARC return on the performance of world equity markets. Further, GARCH-in-mean modeling is used to determine whether there is any evidence of Volatility spillover. It is found that volatility in major world markets do not impact returns in SAARC nation, but ample evidence of volatility spillover is found for India, Bangladesh and Sri Lanka. Similar results are not obtained for Pakistan.

The Lucas Paradox and the Quality of Institutions: Then and Now

In the first era of financial globalization (1880-1914), global capital market integration led to substantial net capital movements from rich to poor economies. The historical experience stands in contrast to the contemporary globalization where gross capital mobility is equally high, but did not incite a substantial transfer of savings from rich to poor economies. Using data for the historical and modern periods we extend Lucas’ (1990) original model and show that differences in institutional quality between rich and poor countries can account for the sharply divergent patterns of international capital movements.

Has International Financial Co-Movement Changed?: Emerging Markets in the 2007-2009 Financial Crisis

Emerging market (EM) assets have historically been regarded as inherently risky and particularly vulnerable to international shocks that result in a general increase in investor risk perceptions. In this paper, we assess the ongoing relevance of this view by examining the linkages between EM and non-EM stock and bond markets in the past two decades, with a focus on how these relationships played out during the global financial crisis of 2007-2009. We evaluate how these linkages have evolved over the period 1992-2009, through statistical tests of whether the volatility of EM financial markets changed - either in their response to international shocks originating in advanced economy markets or in their independent fluctuations. We find that over the longer period EM bond and stock prices have on average moved in the same direction as the prices of non-EM risky assets, and this co-movement has persisted. However, these relationships have evolved somewhat over time. Both EM sensitivity to international shocks and EM-specific volatility in EM sovereign bond spreads appear to have decreased over time, consistent with the greater fundamental stability of EM economies and perhaps a reduced inclination by investors to sell off EM assets in response to a rise in risk perceptions. Somewhat in contrast, while an upward trend in co-variation between EM and non-EM stock prices suggests an increasing degree of global market integration, idiosyncratic volatility has declined, consistent with a diminished level of locally-driven risk in these markets. In addition, the response of EM asset prices to the latest financial crisis appears to be moderate in comparison to historical experience. This evidence may reflect reduced EM vulnerability to external shocks in general, which is consistent with some encouraging improvements in the underlying fundamentals of EM economies over the decade preceding the onset of the crisis.

Accepting the Challenges of the Ongoing Financial Crisis and Global Market Integration: Highlighting the Critical Role of Cooperative Finance for Sustainability

The global financial system is in a systemic crisis, with the failure of major global financial institutions and the seizure of global credit markets. While the global financial system did not collapse, as the result of a series of significant government interventions, the full extent of the economic impact of the current crisis is yet to be determined. With respect to the current crisis in financial markets, designing a sustainable future that removes once and for all the underlying problem is proving challenging. Nonetheless, financial quality improvement and cooperative finance could help removing some deep problems and lead the world to sustainability.

Integration between Securitized Real Estate and Stock Markets: A Global Perspective

Executive Summary. This study uses a dataset comprised of 13 developed securitized real estate markets to measure a real estate securities market's integration with global stock, global real estate, and local stock markets of the respective regions. The time-varying integration score results indicate these developed markets are more integrated with their local stock market while weakly integrated with the global stock and global real estate markets. Additionally, these real estate markets have shown some tendency toward global stock or global real estate market integration, while at the same time have displayed some interdependence with local stock markets. These findings will help investors better understand real estate securities market integration in the context of globalization.