IDEAS home Printed from https://ideas.repec.org/p/kob/dpaper/dp2020-32.html
   My bibliography  Save this paper

Bilateral Integration Measures and Risk Attitudes in Large Stock Markets

Author

Listed:
  • Shoka Hayaki

    (Graduate School of Business Administration, Kobe University and Junior Research Fellow, Research Institute for Economics and Business Administration, Kobe University, JAPAN)

Abstract

This paper examines whether developed markets are more internationally integrated than emerging markets. A new bivariate regime switching model is constructed in order to take into account both international integration regime and segmentation regime, capture the endogenous and interactive effects between large markets, and pay attention to the economic structure of the price of variance risk. We estimated such regime switching model for 24 large stock markets and the US market as a reference market. That is, the regime reflects whether each of the 24 markets is integrated with the US. As a result, the structures of representative investor's risk attitude, or that of the price of variance risk, in each of the following 15 markets are almost the same; Canada, France, Italy, Australia, Hong Kong, Netherlands, Spain, Sweden, Switzerland, Brazil, South Korea, Taiwan, Indonesia, Mexico and Saudi Arabia. In such markets, these "international integration measures" defined as the (smoothed) probability of international integration regime are on average high, declining before the 2008 global financial crisis, but rising again after the crisis. This means that non-home-biased strategies such as an international diversification have advantages over home-biased strategies such as a domestic concentration except just before the crisis. In addition, the difference between the international integration measures of developed and emerging markets included in these markets is extremely small. In other words, being an emerging market does not mean that the market is segmented. Summing up the above results, it can be concluded that the international diversification is strongly recommended in these markets regardless of country or period.

Suggested Citation

  • Shoka Hayaki, 2020. "Bilateral Integration Measures and Risk Attitudes in Large Stock Markets," Discussion Paper Series DP2020-32, Research Institute for Economics & Business Administration, Kobe University.
    • Handle: RePEc:kob:dpaper:dp2020-32
    as

    Download full text from publisher

    File URL: https://www.rieb.kobe-u.ac.jp/academic/ra/dp/English/DP2020-32.pdf
    File Function: First version, 2020
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Pukthuanthong, Kuntara & Roll, Richard, 2009. "Global market integration: An alternative measure and its application," Journal of Financial Economics, Elsevier, vol. 94(2), pages 214-232, November.
    2. de Jong, Frank & de Roon, Frans A., 2005. "Time-varying market integration and expected returns in emerging markets," Journal of Financial Economics, Elsevier, vol. 78(3), pages 583-613, December.
    3. Daniel Kahneman & Amos Tversky, 2013. "Prospect Theory: An Analysis of Decision Under Risk," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 6, pages 99-127, World Scientific Publishing Co. Pte. Ltd..
    4. Hamilton, James D., 1990. "Analysis of time series subject to changes in regime," Journal of Econometrics, Elsevier, vol. 45(1-2), pages 39-70.
    5. Hamilton, James D., 1988. "Rational-expectations econometric analysis of changes in regime : An investigation of the term structure of interest rates," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 385-423.
    6. Bollerslev, Tim, 1990. "Modelling the Coherence in Short-run Nominal Exchange Rates: A Multivariate Generalized ARCH Model," The Review of Economics and Statistics, MIT Press, vol. 72(3), pages 498-505, August.
    7. De Santis, Giorgio & Gerard, Bruno, 1997. "International Asset Pricing and Portfolio Diversification with Time-Varying Risk," Journal of Finance, American Finance Association, vol. 52(5), pages 1881-1912, December.
    8. Fidora, Michael & Fratzscher, Marcel & Thimann, Christian, 2007. "Home bias in global bond and equity markets: The role of real exchange rate volatility," Journal of International Money and Finance, Elsevier, vol. 26(4), pages 631-655, June.
    9. Yeung Lewis Chan & Leonid Kogan, 2002. "Catching Up with the Joneses: Heterogeneous Preferences and the Dynamics of Asset Prices," Journal of Political Economy, University of Chicago Press, vol. 110(6), pages 1255-1285, December.
    10. Karolyi, G. Andrew & Wu, Ying, 2018. "A New Partial-Segmentation Approach to Modeling International Stock Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 53(2), pages 507-546, April.
    11. Akbari, Amir & Ng, Lilian & Solnik, Bruno, 2020. "Emerging Markets Are Catching Up: Economic or Financial Integration? - CORRIGENDUM," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 55(7), pages 2429-2429, November.
    12. Harvey, Campbell R, 1991. "The World Price of Covariance Risk," Journal of Finance, American Finance Association, vol. 46(1), pages 111-157, March.
    13. Hamilton, James D. & Susmel, Raul, 1994. "Autoregressive conditional heteroskedasticity and changes in regime," Journal of Econometrics, Elsevier, vol. 64(1-2), pages 307-333.
    14. Akbari, Amir & Ng, Lilian & Solnik, Bruno, 2020. "Emerging Markets Are Catching Up: Economic or Financial Integration?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 55(7), pages 2270-2303, November.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Boubakri, Salem & Guillaumin, Cyriac, 2011. "Financial integration and currency risk premium in CEECs: Evidence from the ICAPM," Emerging Markets Review, Elsevier, vol. 12(4), pages 460-484.
    2. Pagan, Adrian, 1996. "The econometrics of financial markets," Journal of Empirical Finance, Elsevier, vol. 3(1), pages 15-102, May.
    3. Sadok El Ghoul & Omrane Guedhami & Sattar A. Mansi & Oumar Sy, 2023. "Event studies in international finance research," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 54(2), pages 344-364, March.
    4. Baele, Lieven, 2005. "Volatility Spillover Effects in European Equity Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 40(2), pages 373-401, June.
    5. Bekaert, Geert & De Santis, Roberto A., 2021. "Risk and return in international corporate bond markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 72(C).
    6. Qin, Weiping & Cho, Sungjun & Hyde, Stuart, 2022. "Measuring market integration during crisis periods," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 78(C).
    7. Tom A. FEARNLEY, 2002. "Tests of an International Capital Asset Pricing Model with Stocks and Government Bonds and Regime Switching Prices of Risk and Intercepts," FAME Research Paper Series rp97, International Center for Financial Asset Management and Engineering.
    8. Su, EnDer, 2017. "Stock index hedging using a trend and volatility regime-switching model involving hedging cost," International Review of Economics & Finance, Elsevier, vol. 47(C), pages 233-254.
    9. Tom A. FEARNLEY, 2002. "Estimation of an International Capital Asset Pricing Model with Stocks and Government Bonds," FAME Research Paper Series rp95, International Center for Financial Asset Management and Engineering.
    10. Guesmi, Khaled & Nguyen, Duc Khuong, 2011. "How strong is the global integration of emerging market regions? An empirical assessment," Economic Modelling, Elsevier, vol. 28(6), pages 2517-2527.
    11. Khaled Guesmi, 2011. "Time varying regional integration in emerging stock market," Economics Bulletin, AccessEcon, vol. 31(2), pages 1082-1094.
    12. Chambet, Anthony & Gibson, Rajna, 2008. "Financial integration, economic instability and trade structure in emerging markets," Journal of International Money and Finance, Elsevier, vol. 27(4), pages 654-675, June.
    13. Chaieb, Ines & Langlois, Hugues & Scaillet, Olivier, 2021. "Factors and risk premia in individual international stock returns," Journal of Financial Economics, Elsevier, vol. 141(2), pages 669-692.
    14. Khaled Khaled & Amel Belanes & Sandrine Kablan, 2018. "The regional pricing of risk: An empirical investigation of the MENA Region," Economics Bulletin, AccessEcon, vol. 38(2), pages 751-760.
    15. L. Bauwens & E. Otranto, 2013. "Modeling the Dependence of Conditional Correlations on Volatility," Working Paper CRENoS 201304, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia.
    16. Bai, Ye & Green, Christopher J., 2020. "Country and industry factors in tests of Capital Asset Pricing Models for partially integrated emerging markets," Economic Modelling, Elsevier, vol. 92(C), pages 180-194.
    17. Su, EnDer, 2013. "Stock index hedge using trend and volatility regime switch model considering hedging cost," MPRA Paper 49190, University Library of Munich, Germany.
    18. Baele, L., 2003. "Volatility Spillover Effects in European Equity Markets," Other publications TiSEM dae0be49-4f32-433e-822b-1, Tilburg University, School of Economics and Management.
    19. Balcılar, Mehmet & Demirer, Rıza & Hammoudeh, Shawkat, 2015. "Regional and global spillovers and diversification opportunities in the GCC equity sectors," Emerging Markets Review, Elsevier, vol. 24(C), pages 160-187.
    20. Tai, Chu-Sheng, 2004. "Looking for risk premium and contagion in Asia-Pacific foreign exchange markets," International Review of Financial Analysis, Elsevier, vol. 13(4), pages 381-409.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kob:dpaper:dp2020-32. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Office of Promoting Research Collaboration, Research Institute for Economics & Business Administration, Kobe University (email available below). General contact details of provider: https://edirc.repec.org/data/rikobjp.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.