Time‐Varying World Market Integration

TLDR

The study proposes a measure of capital market integration derived from a conditional regime‑switching model. The measure captures expected returns by modeling countries that are segmented from world capital markets in one period and become integrated later, using a conditional regime‑switching framework. The analysis shows that several emerging markets display time‑varying integration, with some being more integrated than anticipated and others remaining segmented despite liberal foreign access, indicating that global market integration is not uniformly increasing.

Abstract

ABSTRACT We propose a measure of capital market integration arising from a conditional regime‐switching model. Our measure allows us to describe expected returns in countries that are segmented from world capital markets in one part of the sample and become integrated later in the sample. We find that a number of emerging markets exhibit time‐varying integration. Some markets appear more integrated than one might expect based on prior knowledge of investment restrictions. Other markets appear segmented even though foreigners have relatively free access to their capital markets. While there is a perception that world capital markets have become more integrated, our country‐specific investigation suggests that this is not always the case.