Time-varying Market Integration Research Articles

Financial integration in the EU28 equity markets: Measures and drivers

We examine time-invariant and time-varying market integration across European stock markets. Financial integration increases during the sovereign debt crisis and is mainly driven by macroeconomic variables, market capitalization, political uncertainty, and technological developments. Higher market integration is associated with decreasing diversification benefits. During crises, investors select portfolios that are not only explained by firm characteristics.

Time-Varying Integration of REITs with Stocks: A Kalman Filter Approach

This paper tests the level of market integration between Equity Real Estate Investment Trusts (REITs) and the stock market, using the Korajczyk (1996) market integration index and the Kalman filter methodology. The Kalman-filter technique is employed to capture the dynamic degree of integration between REITs and the stock market. The results show that REITs were highly integrated with the stock market throughout most of the sample period from 1984:1 to 2018:12. Nonetheless, the time varying market integration index displays a number of changes, which coincide with fluctuations in the legislation governing REITs and certain market and economic events. As a robustness check, we also compare the time varying market integration index of REITs with that displayed by Utilities. The results show that Utilities displayed a similar time varying market integration pattern to that of REITs and so indicates that the changes in market integration is not simply a REIT factor but a high yield sector phenomenon. Unlike REITs, from April 2011 Utilities became segmented from the stock market and remained so up to the end of the sample period, even though the static integration index suggested that utility stocks were integrated with the stock market over the whole sample period. Last, results show that the Kalman filter approach is more useful than static models when studying the integration process and so casts strong doubt on the validity of time invariant models to measure market integration.

An Investigation of Global and Regional Integration of ASEAN Economic Community Stock Market: Dynamic Risk Decomposition Approach

ABSTRACTThis article investigates the dynamic pattern of stock market relations between the ASEAN Economic Community (AEC) and two major stock markets: China and the United States. A GARCH risk decomposition model is developed to reflect the time-varying market integration. The primary findings of this study are as follows. First, the AEC is more integrated with the regional stock market than with the global stock market. Second, the movement in the AEC stock market is mainly driven by domestic economic situations. Third, external shocks only affect the level of integration of the AEC temporarily. Finally, international investors are able to significantly reduce unsystematic risk by adding an AEC market portfolio into their existing portfolios.

Time varying international financial integration for GCC stock markets

Abstract This paper develops international financial integration index for GCC stock markets by employing an international asset pricing model of time-varying market integration and DCC-GARCH methodology. There are wide ranges in the degree of integration for GCC stock markets and none of them appear to be under complete segmentation. We find that trade openness, financial market development, turnover and oil revenue have significant positive impact on integration index of GCC stock markets. Global financial crisis has a significant negative impact on integration index. Our results have policy implications for GCC markets.

Evolution of world crude oil market integration and diversification: A wavelet-based complex network perspective

Previous research on the crude oil market has focused on the constant degree of the market integration or diversification, ignoring the time-varying market integration and diversification during different typical stages of the global oil price volatility. This paper proposes a novel wavelet-based complex network method to investigate the evolution feature of the world crude oil market integration and diversification from the perspective of the interdependent structural relationship of global oil prices, so that two critical reference indexes, namely the reference decision-making cycle and the target regional market, will be proposed for decision makers to better adjust their strategies. The results show that the dominant evolution cycle of the market integration from the stable stage to the high shock stage is time-varying, featuring the weekly→weekly→short yearly→short quarterly→short monthly cycle, and the dominant evolution cycle of the market diversification is also time-varying, characterized by the short monthly→weekly→long yearly→weekly→weekly cycle. These findings provide a clearer reference decision-making cycle for decision makers to create a more efficient period-oriented strategy. Two larger stable homogeneous groups of regional oil markets and the dominant regional markets in the process of the market evolution are discovered, providing more details regarding the target monitoring regional market for the oil-related early warningstrategy and hedging strategies.

How strong is the global integration of emerging market regions? An empirical assessment

This paper attempts to evaluate the time-varying integration of emerging markets from a regional perspective based on a conditional version of the International Capital Asset Pricing Model (ICAPM) with DCC-GARCH parameters that allows for dynamic changes in the degree of market integration, global market risk premium, regional exchange-rate risk premium, and local market risk premium. Our findings reveal several interesting facts. First, the time-varying degree of integration of four emerging regions under consideration, satisfactorily explained by the regional level of trade openness and the term premium of US interest rates, has recently tended to increase, but these markets still remain substantially segmented from the world market. Second, the local market risk premium is found to explain more than 50% of the total risk premium for emerging market returns. Finally, we show that conditional correlations usually underestimate and overstate the measure of time-varying market integration. The empirical results of this study have some important implications for both global investors and policymakers with respect to dedicated portfolio investments in emerging markets and policy adjustments.

International Dynamic Asset Allocation and Return Predictability

Abstract: The presence of time varying investment opportunity sets has been documented in the context of international asset allocation, and the economic value associated with these is a topic of lively debate in the academic literature. This paper constructs simple, real‐time dynamic international asset allocation strategies based on daily data that exploit the return predictability arising from time varying market integration. Our timing strategies outperform the major (US, UK, Japanese and German) country indices and related portfolios, particularly in down markets. The strategies appear to capture much of the economic value of the return predictability implied by market integration and have many of the characteristics of successful timing strategies.

Time-varying market integration and stock and bond return concordance in emerging markets

We investigate the extent to which emerging stock market integration affects the joint behavior of stock and bond returns using a two-stage semi-parametric approach. Using a sample of 18 emerging markets, we find an unambiguous and robust link between emerging stock market integration and stock–bond return decoupling. We explain this with a decline in the segmentation risk premia in equities modeled by De Jong and De Roon [De Jong, F., De Roon, F.A., 2005. Time-varying market integration and expected returns in emerging markets. Journal of Financial Economics 78, 583–613] that leads to increased demand for stocks and reduced or unchanged demand for bonds. Our findings deliver new insights into the financial liberalization and stock–bond comovement literatures.

Market integration and extreme co-movements in APEC emerging equity markets

Extreme market co-movements in the context of time-varying market integration are investigated for APEC emerging equity markets using the concept of extreme correlation. We show that both foreign and domestic portfolio investments have contributed to extreme market movements; and extreme correlation is time-varying and dependent on local and regional market integrations. However, the relationship between market integration and extreme correlation varies across markets.

Time-Varying Market Integration and Expected Returns in Emerging Markets

Time-Varying Market Integration and Expected Returns in Emerging Markets

Time-varying market integration and expected returns in emerging markets

In the last two decades, emerging stock markets have become less segmented from world stock markets. The average annual decrease in segmentation of 0.055, on a [ 0 , 1 ] scale, reduces the cost of capital (measured by dividend yields) by about 11 basis points, and reduces stock returns by about 4.5%. The decline in expected returns is due to a decrease in two types of segmentation. A fall in local segmentation accounts for about 2/3 of the decline in expected returns. The remaining 1/3 is due to a fall in the level of segmentation of the region. These results, which we document for 30 emerging markets, are robust to the addition of control variables.

Time Varying Market Integration as a Regime Switching Process

We attempt to estimate the likelihood of the integration of Indian stocks with the world market using Markov regime switching model. Bekaert and Harvey (1995)'s empirical model has been suitably extended to accommodate GARCH-M effect to estimate the level of integration. Given the small sample size, the maximum likelihood estimates have been estimated using an innovative grid approach. The level of integration clearly varies with the size of the stocks: larger stocks are more integrated than smaller stocks. Time varying integration plots are used to identify the change in the level of integration with important events that took place in Indian/International capital markets.