ادغام 22 بازار سهام نوظهور: آنالیز سه بعدی

We apply the three-dimensional analysis of wavelet coherency to examine the integration of 22 emerging stock markets with the U.S. market. We find a high degree of co-movement at relatively lower frequencies between the U.S. and the 22 individual emerging markets. Our results show that the strength of co-movement, however, differs by country. For example, we report a high degree of co-movement between the U.S. and Brazil, Mexico and Korea, but low co-movement with and Egypt and Morocco. Our analyses also document a general change in the pattern of the market relationship after 2006, where we detect co-movements at relatively higher frequencies. Co-movement at the highest frequencies is, however, weak for fluctuations with duration less than a year. Our findings imply that investing selectively in emerging markets may provide significant diversification benefits which, invariably, depend on the investment horizon.

Examining global stock market integration is a central issue in finance given the implied consequences for asset allocation decisions and portfolio diversification. A well-integrated international stock market implies low or no international diversification benefits. Internationally segmented stock markets, on the other hand, would enable portfolio managers to diversify and take advantage of the differences in the markets. Grubel (1968), using principles developed by Nobel Laureate Harry Markowitz (1952), shows that an internationally diversification portfolio yields higher rates of return or lower variances relative to a purely national diversification of assets. This conclusion is supported by Levy and Sarnat (1970), Agmon (1972), and Grauer and Hakansson (1987). These practical insights have heightened the interest of both finance academics and practitioners to gage the level of stock market integration. In this paper we re-examine the integration of 22 emerging stock markets using the powerful three-dimensional analysis of wavelet coherency. A domain of the global stock market integration literature examines the co-movement of international stock prices.1 The early literature shows low co-movement of market returns between countries (see Hilliard, 1979). The more contemporary literature, on the other hand, documents an increase in international co-movement of stock returns in global markets (see for example Brooks and Del Negro, 2004, Click and Plummer, 2005 and Kizys and Pierdzioch, 2009, and Beirne, Caporale, Schulze-Ghattas, & Spagnolo, 2010) since the mid-1990s.2Lucey and Zhang (2009) further show that countries with smaller cultural distance have higher stock market co-movement. These studies also find that the degree of co-movement is not constant over time (which implies revolving risk exposure). Most of the previous studies have evaluated the co-movement of stock returns through the correlation coefficient whilst investigating the evolving properties either through a rolling window correlation coefficient (see, for example, Brooks and Del Negro (2004)) or by considering non-overlapping sample periods (see, for example, King and Wadhwani (1990) and Lin, Engle, and Ito (1994)) without any investment horizon distinction.3 Exceptions to this trend of analysis include Rua and Nunes (2009) who apply wavelet coherency and show that the strength of the co-movement of international stock returns is relatively high among developed markets. Rua and Nunes (2009) also demonstrate that co-movements among developed markets differ by country but is contingent on the frequency level, with a higher strength in the co-movements of stock returns at lower frequencies suggesting greater benefits from international diversification in the short-term relative to the long-term. This confirms the need for stock markets co-movement analysis to also allow for a distinction between the short-term and long-term investor (Candelon, Piplack, & Straetmans, 2008). A frequency domain analysis would allow for this distinction (see e.g., A'Hearn & Woitek, 2001 and Pakko, 2004). From the point of view of portfolio diversification, short-term (long-term) investors would be more concerned with the co-movement of stock returns at higher (lower) frequencies. The purpose of our study is to examine the co-movement of 22 emerging stock markets located in the Americas, Europe, Asia and Middle East/Africa with the U.S. stock market. For this reason we apply the three-dimensional analysis of wavelet coherency, which is beneficial since it allows for the identification of regions in a unified time interval-frequency band space where two stock markets co-vary. In such regions, the gains of portfolio diversification are relatively lower. The method concurrently allows for an assessment of the impact of investment horizon. These advantages enable fresh important insights into the broad characterisation of the level of integration in international stock markets. The above-mentioned advantages suggest that wavelet coherency offers a refinement in terms of analysis. Given this some recent studies, mainly focusing on developed stock markets, have used the methodology in measuring market dependences.4 In the stock integration literature, Rua and Nunes (2009) and Ranta (2009) apply wavelet analysis and find that co-movements involving stock market returns of Germany, Japan, the UK, and the US in this unified time-frequency framework vary by country and are stronger at lower frequencies. Graham and Nikkinen (2011) also find a high degree of co-movements of stock returns and volatilities at low frequencies between Finland and rest of the world. They also find high levels of co-movement of returns and volatilities across all frequencies between the World equity portfolio and equities in France, Germany, Switzerland and the UK. The evidence from these studies confirms the importance of taking into account the investment horizon of the investor in co-movement of stock returns. International portfolio diversification strategies, however, are not limited to developed markets but encompass emerging markets as well. Examining emerging market stock is important as they currently make up 10 of the 20 largest economies of the world.5 As such we contribute to the literature by extending the previous studies to cover 22 individual emerging markets, thereby, enhancing understanding of stock market co-movements with the significant emerging market segment of the global equity market. The results of this paper also extend the current literature as emerging markets profess market characteristics that are different from developed markets. Emerging markets are generally seen to be relatively risky because of the additional risks (e.g., political, economic, and currency) they bear. There is also wide recognition in the literature that emerging market equities have vastly different characteristics than equities from developed capital markets including higher average returns, higher volatility, and low correlations with developed market returns (see e.g., Bekaert & Harvey, 1995). In this study, we focus on the last feature and apply a methodology the takes into account both time and frequency. Lack of dependence between the U.S. stock market and the emerging stock markets and would offer international portfolio diversification benefits. We examine co-movement of the emerging markets with the U.S. market from the U.S. investor's point of view. We report robust results indicating a high degree of co-movement at relatively lower frequencies over the entire data sample period between MSCI USA and the 22 individual emerging market MSCI indexes. The strength of the co-movement, however, differs by country, thereby, supporting previous studies. The empirical findings also point to a change in the pattern of the relationship after 2006 where we detect co-movements at relatively higher frequencies. Co-movement is, however, weaker for fluctuations with duration less than a year at the highest frequencies. Our results support earlier findings suggesting that international co-movement in stock prices is non-constant over time. The empirical results presented in this paper have several practical implications for risk assessment of portfolios and asset allocation decisions across the different emerging regions. For instance, the finding of strong co-movements of stock returns at lower frequencies implies smaller gains from portfolio diversification in the long term. Also, the cross-country variation in co-movements presents an opportunity to detect emerging market regions where diversification benefits are greatest. The remainder of this paper is organized as follows. In Section 2 we present an overview of the wavelet coherency methodology used to describe the stock market integration. Section 3 discusses the data and presents some descriptive statistics. Section 4 presents the empirical findings on stock market integration of the U.S. and the emerging markets and Section 5 concludes.

The assessment of the co-movements of stock returns in global equity markets is important in asset allocation and risk management. In this paper we re-assess the integration of 22 emerging stock markets located in the Americas, Europe, Asia and Middle East/Africa with the U.S. market by utilizing the powerful wavelet analysis tool. The study is of interest because it is now a stylized fact that the degree of co-movement in stock returns changes over time and a distinction must be made between the short term and the long term investor. Wavelet coherency allows for the examination of the time-and-frequency varying co-movements of stock markets within a unified framework. Generally, we find that the co-movements of stock market returns between the U.S and emerging regions occur for low frequencies (long-term fluctuations). The strength of the co-movement, however, varies by country. An important implication of our findings is that, consistent with prior literature, the degree of stock market integration is changing over time. We detect a consistent change in the pattern of the relationship for all stock market pairs after 2006 where we note co-movements at relatively higher frequencies from prior frequency levels. Consequently, the co-movement of U.S. stock returns with emerging capital markets also reflects the documented time-varying characteristics of global equity markets. Interestingly, the change in co-movement to relatively higher frequencies coincides with the onset on the current global financial crisis. The temporal instability of correlation coefficients over time could result in structural breaks in the asset price series when there are external shocks like financial crises. It may be that the co-movement at relatively higher frequencies after 2006 reflects new stock market relationship during and after the economic shock. Co-movement is, however, weaker for fluctuations with duration less than a year at the highest frequencies. From a risk management point of view, we infer from our evidence that it would be beneficial for U.S. investors to invest in emerging markets, especially for short-term investment horizons. Although some recent studies suggest that the co-movement in global equity markets may have increased over time, some short-term diversification benefits are still apparent.