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Equity risk premium and regional integration

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  • Arouri, Mohamed
  • Teulon, Frédéric
  • Rault, Christophe

Abstract

This article contributes to the literature on stock market integration by developing and estimating a capital asset pricing model with segmentation effects in order to assess stock market segmentation and its effects on risk premia at the regional level. We show that the estimated degrees of segmentation vary from one region to another and over time. Moreover, we establish that compared to developed market regions, emerging market regions have four main dissimilarities: the total risk premiums are significantly higher, more volatile, dominated by regional residual risk factors and reflect mostly regional events. However, in the recent period emerging market regions have become less segmented as a result of liberalization and reforms and the relative magnitude of the premium associated with global factors has increased.

Suggested Citation

  • Arouri, Mohamed & Teulon, Frédéric & Rault, Christophe, 2013. "Equity risk premium and regional integration," International Review of Financial Analysis, Elsevier, vol. 28(C), pages 79-85.
    • Handle: RePEc:eee:finana:v:28:y:2013:i:c:p:79-85
    DOI: 10.1016/j.irfa.2013.02.009
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    More about this item

    Keywords

    Asset pricing; Regional integration; Equity risk premium;
    All these keywords.

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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