یکپارچه سازی بازار و سرایت: شواهدی از بازارهای نوظهور سهام و ارز آسیا

This paper examines whether Asian emerging stock markets (India, Korea, Malaysia, Philippines, Taiwan, and Thailand) have become integrated into world capital markets since their official liberalization dates by estimating and testing a dynamic integrated international capital asset pricing model (ICAPM) in the absence of purchasing power parity (PPP) using an asymmetric multivariate GARCH(1,1)-in-Mean approach. Also examined in this paper is whether there are pure contagion effects between stock and foreign exchange markets for each Asian country during the 1997 Asian crisis. The empirical results show that first, both currency and world market risks are priced and time-varying, suggesting that an international asset pricing model under PPP and constant price of risk might give rise to model misspecification. Second, the stock markets for India, Korea, Malaysia, Philippines, and Thailand were segmented from the world capital markets before their liberalization dates, but all six markets have become fully integrated since then. Third, the market liberalization has reduced the cost of capital and price volatility for most of the countries. Finally, as for the contagion effects, strong positive impact of return shocks originating from the domestic stock market to its foreign exchange market during the crisis is found. This dynamic relationship between stock market and foreign exchange market is consistent with stock-oriented exchange rate models.

A large number of Asian emerging markets have embarked on a series of reforms in recent years, including liberalization of their national stock markets. As a result of these developments and the important implications of market integration on international capital budgeting and investment, market integration has emerged as an important body of literature. Two recent examples of this literature that study the impact of market liberalization on market integration for Asian emerging markets are Bekaert and Harvey (1995) and De Santis and Imrohoroglu (1997).1Bekaert and Harvey (1995) propose a one-factor asset pricing model that allows the conditional expected returns of a country to be affected by their covariance with a world benchmark portfolio and by the variance of the country returns. They use a conditional regime-switching model to account for periods when national markets were segmented from world capital markets and when they became integrated later in the sample. In contrast to general perceptions that markets are becoming more integrated, their results suggest that some countries are becoming less integrated into the world market. However, based on specification tests, their model is rejected in most countries. They point out that one possible extension of their study is to consider currency risk as another potential priced factor. Instead of using the conditional regime-switching methodology, De Santis and Imrohoroglu (1997) utilize the multivariate GARCH(1,1)-in-Mean approach. They introduce a dynamic integration version of the classic CAPM framework that assumes full market segmentation until the official liberalization date of each market, and full integration thereafter to capture the fact that the analyzed markets were legally segmented for part of the sample period. Their empirical results show that neither the country-specific risk, nor the world market risk is priced and thus no conclusion can be made regarding the impact of market liberalization on market integration. One possible common cause for the weak findings of De Santis and Imrohoroglu (1997) and the rejection of Bekaert and Harvey's model is that both assume purchasing power parity (PPP) and thus ignore currency risk, which motivates the current research. In addition to considering currency risk in testing market integration, this paper differs from Bekaert and Harvey, 1995 and Bekaert and Harvey, 1997 and De Santis and Imrohoroglu (1997) in one important aspect. That is, the asset pricing model specified in this paper allows me to test not only market integration, but also contagion between local stock market and foreign exchange market during the 1997 Asian crisis, which will be explained next. Due to a series of financial crises in the 1990s including the Exchange rate Mechanism (ERM) attacks of 1992, the Mexican peso collapse of 1994, the Asian crisis of 1997, the Russian collapse of 1998, and the Brazilian devaluation of 1999, the study of the transmission of financial shocks/crisis across markets/countries has also emerged as one of the most intensive research topics in international finance literature in recent years. Previous papers on this topic have failed to take into account an important distinction between the two concepts of interdependence and contagion except Forbes and Rigobon (2002). 2 Masson (1998) argues that there are three main channels that financial markets turbulence can spread from one country to another: monsoonal effects, spillovers and pure contagion effects. ‘Monsoonal’ effects, or ‘contagions from common causes’ tend to occur when affected countries have similar economic fundamentals or face common external shocks. The second type of financial market inter-linkages arises from spillover effects, which may be due to trade linkages or financial interdependence. The first two channels of financial crises can be categorized as fundamentals-driven crises since the affected countries share some macroeconomic fundamentals, which implies that the transmission of financial crises is due to the interdependence among those countries and not necessarily due to contagion. The third transmission channel is the pure contagion effect. Contagion here refers to the cases where crisis in one country/market triggers a crisis elsewhere for reasons unexplained by macroeconomic fundamentals. For instance, a crisis in one country may lead creditors and investors to pull out from other countries over which they have a poor understanding resulting from information asymmetries. Given the facts that both market integration and contagion have important implications in international finance and that previous studies in these two topics are inconclusive and thus debatable, in this paper I attempt to provide new empirical evidence on these two issues. Specifically, I develop a dynamic version of international capital asset pricing model (ICAPM) in the absence of PPP, and then test the model using the data from six Asian emerging countries. This study contributes our understanding in the return dynamics of emerging markets with respect to market integration and contagion in several ways. First of all, unlike previous studies on market integration (e.g., Bekaert and Harvey, 1995 and De Santis and Imrohoroglu, 1997), PPP is not assumed when testing market integration/segmentation hypothesis. Many empirical studies have documented that PPP does not hold, especially in short horizons.3 In the absence of PPP, international investors will face different real returns when holding the same assets. In this case, currency risk will emerge as another potential priced factor. Secondly, previous studies have failed to control for the economic fundamentals when testing contagion. In this paper, I rely on the developed ICAPM, which provides me a theoretical basis in selecting the economic fundamentals. The economic fundamentals under ICAPM are the world market and currency risks, so the evidence of contagion is based on testing whether idiosyncratic risks — the part that cannot be explained by the world market and currency risks, are significant in describing the return dynamics of both stock and foreign exchange markets for each emerging country during the 1997 Asian crisis. Finally, a parsimonious parameterization of asymmetric trivariate GARCH(1,1)-in-Mean process is employed to model the conditional covariance matrix of asset returns, which is very important in testing contagion.4 The advantage of this multivariate approach is that it utilizes the information in the entire variance–covariance matrix of the errors, which, in turn, leads to more precise estimates of the parameters of the model. The empirical results show that first, both currency and world market risks are priced and time-varying, suggesting that an international asset pricing model under PPP and constant price of risk might give rise to model misspecification. Second, the stock markets for India, Korea, Malaysia, Philippines, and Thailand were segmented from the world capital markets before their liberalization dates, but all markets have become fully integrated since then. Third, consistent with Bekaert and Harvey (1997), Stulz (1999) and Henry (2000b), the market liberalization has reduced the cost of capital and price volatility for most of the countries. Finally, as for the contagion effects, strong positive impact of return shocks originating from the domestic stock market to its foreign exchange market during the crisis is found. This dynamic relationship between stock market and foreign exchange market is consistent with stock-oriented exchange rate models. The remainder of this paper is organized as follows. Section 2 describes the dynamic version of ICAPM in the absence of PPP. Section 3 presents the econometric methodologies used to estimate and test the model. Section 4 discusses the data. Section 5 reports the empirical results. Summary and concluding remarks are offered in Section 6.

In this paper, I have developed a dynamic integrated ICAPM in the absence of PPP in an attempt to examine market integration and contagion using data from six Asian emerging countries. In testing market integration, the dynamic integrated ICAPM allows full market segmentation until the official liberalization date and full market integration thereafter. To test pure contagion effect between foreign exchange and domestic stock markets, I first control for the economic fundamentals or systematic risks and overall mean spillovers. I then allow the past return shocks from one market to affect the current returns of the other market during the 1997 Asian crisis. This study contributes our understanding in the dynamics of asset returns in emerging markets in several ways. First of all, unlike previous studies on market integration (e.g., Bekaert and Harvey, 1995 and De Santis and Imrohoroglu, 1997), PPP is not assumed when testing market integration/segmentation hypothesis. Secondly, previous studies have failed to control for the economic fundamentals when testing contagion. In this paper, I rely on the developed integrated ICAPM, which provides me a theoretical basis in selecting the economic fundamentals. The economic fundamentals under ICAPM are the world market and currency risks, so the evidence of contagion is based on testing whether idiosyncratic risks — the part that cannot be explained by the world market and currency risks, are significant in describing the return dynamics of foreign exchange and stock markets for each emerging country during the crisis. Finally, a parsimonious parameterization of asymmetric trivariate GARCH(1,1)-in-Mean process is employed to model the conditional covariance matrix of asset returns. Since the ICAPM is fully parameterized, several interesting statistics including estimated returns and conditional volatility can be recovered. The empirical results can be summarized as follows. First, both currency and world market risks are priced and time-varying, suggesting that an international asset pricing model under PPP and constant price of risk might give rise to model misspecification as I have shown to be the case for De Santis and Imrohoroglu (1997). Since currency risk is priced, investors are compensated for bearing such risk, and thus should not be discouraged by more flexible exchange rate regimes from investing in emerging markets. Second, I find that the stock markets for India, Korea, Malaysia, Philippines, and Thailand are segmented from the world capital markets before their liberalization dates, but have become fully integrated since then. Moreover, the market liberalization has reduced the cost of equity capital and price volatility for most of the markets. Finally, as for the contagion effects, strong positive impact of return shocks originating from the domestic stock market to its foreign exchange market during the crisis is found. This dynamic relationship between stock market and foreign exchange market is consistent with stock-oriented exchange rate models.