Journal of Financial and Quantitative Analysis

Research Article

Characterizing World Market Integration through Time

Francesca Carrieri*, Vihang Errunza* and Ked Hogan*


International asset pricing models suggest that barriers to portfolio flows and availability of market substitutes affect the degree and time variation of world market integration. We use GARCH-in-mean methodology to assess the evolution in market integration for eight emerging markets over the period 1977–2000. Our results suggest that while local risk is still a relevant factor in explaining time variation of emerging market returns, none of the countries appear to be completely segmented. We find that there are substantial crossmarket differences in the degree of integration. The evolution toward more integrated financial markets is apparent although at times we do observe reversals. In addition, we provide clear evidence on the impropriety of directly using correlations of market-wide index returns as a measure of market integration. Finally, financial market development and financial liberalization policies play important roles in integrating emerging markets.


* Carrieri,, and Errunza,, McGill University, Faculty of Management, 1001 Sherbrooke St. W., Montreal, PQ, H3A 1G5, Canada; Hogan,, Barclays Global Investors, 45 Fremont St., San Francisco, CA 94105. We are grateful to Campbell Harvey and René Stulz for numerous insightful comments. We also thank Warren Bailey, Jin-Chuan Duan, Mao-Wei Hung, Andrew Karolyi, Ken Kroner, Usha Mittoo, Birger Nilsson, Michael Rebello, Pierre Ruiz, Sergei Sarkissian, and participants at the 2001 European Financial Management Meetings and CIRANO Finance day, as well as seminar participants at American University, Laval University, the Darden School, and the University of Lausanne for helpful suggestions. We also acknowledge the excellent research assistance of Ines Chaieb, Basma Majerbi, and Marcelo Dos Santos. The comments of Geert Bekaert (the referee) and Paul Malatesta (the editor) were particularly useful. Errunza thanks Bank of Montreal Chair in Finance and Banking and SSHRC for financial support. Carrieri acknowledges financial support from SSHRC.