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Emerging Markets Are Catching Up: Economic or Financial Integration?

Published online by Cambridge University Press:  02 March 2020

Amir Akbari Open the ORCID record for Amir Akbari [Opens in a new window] ,
Lilian Ng Open the ORCID record for Lilian Ng [Opens in a new window]  and
Bruno Solnik Open the ORCID record for Bruno Solnik [Opens in a new window]
Amir Akbari
Affiliation:
Akbari, amir.akbari@uoit.ca, University of Ontario Institute of Technology
Lilian Ng*
Affiliation:
Ng, lng@schulich.yorku.ca, York University
Bruno Solnik
Affiliation:
Solnik, solnik@ust.hk, HEC Paris andHong Kong University of Science and Technology
*
Ng (corresponding author), lng@schulich.yorku.ca
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Abstract

We propose a simple metric to measure two aspects of market integration, namely, economic integration (defined as a common cash-flow dynamic) and financial integration (defined as a common risk-pricing dynamic) and then examine their evolution through time while controlling for volatility. We find that developed (DEV) countries exhibit greater degrees of financial and economic integration than emerging (EMG) markets. Although the financial integration gap between these markets remains large throughout the sample period, the EMG economies are catching up with their DEV counterparts in recent years; their level of economic integration has reached that of DEV countries.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 55 , Issue 7 , November 2020 , pp. 2270 - 2303
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2020

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Footnotes

We thank Kee-Hong Bae, Alexander Barinov, Geert Bekaert, Long Chen, Ric Colacito, Zhi Da, Chuan-Yang Hwang, Zsuzsa Huszar, Andrew Karolyi, Jun Sik Kim, Sie Ting Lau, Yan Li, Qianqiu Liu, David Ng, Richard Roll, Konark Saxena, Michael Schill (the referee), Stephan Siegel, Rien Wagenvoort, Terry Walter, Qinghai Wang, Xiaoyan Zhang, and participants at the 2018 Asian Finance Association Meetings, the 2017 Conference of Asia-Pacific Financial Markets, the 2018 China International Conference in Finance, the 2018 Finance Down Under Conference, the 2018 Financial Management Association (FMA) Meetings, the 2018 FMA Asia/Pacific Conference, Hong Kong University of Science and Technology, and the University of Ontario Institute of Technology for many helpful comments and suggestions. We especially thank Eliza Wu and Bohui Zhang for providing an early motivation for our article. This article is a substantial revision of an earlier version entitled “Integrated Markets: Economic or Financial Integration?” We are grateful to the Asian Finance Association for the 2018 Best Paper Award.

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