Time-Varying World Market Integration




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    • Bekaert is from the Graduate School of Business, Stanford University and National Bureau of Economic Research. Harvey is from the Fuqua School of Business, Duke University and National Bureau of Economic Research. We have benefitted from the comments of Warren Bailey, Henning Bohn, Bob Cumby, Bernard Dumas, Charles Engel, Wayne Ferson, Steve Grenadier, Burton Hollifield, and Robert Hodrick, and from useful discussions with Bruno Solnik and René Stulz and seminar participants at the Ohio State University, the Board of Governors of the Federal Reserve Bank, the University of North Carolina at Chapel Hill, the University of Washington in Seattle, the Western Finance Association in Sante Fe, the National Bureau of Economic Research seminar at the University of Pennsylvania, the European Finance Association in Brussels, and the American Finance Association in Washington, D.C. We are especially indebted to our research assistants, Steve Gray and Michael Urias, for their comments and for the long hours they devoted to the nonlinear estimation. Both the Editor, René Stulz, and an anonymous referee provided many valuable insights which improved the article. Bekaert acknowledges the financial support of an NSF grant and the Financial Services Research Initiative and the Bass Faculty Fellowship of the Graduate School of Business at Stanford. Harvey's research was supported by the Batterymarch Fellowship.


We propose a measure of capital market integration arising from a conditional regime-switching model. Our measure allows us to describe expected returns in countries that are segmented from world capital markets in one part of the sample and become integrated later in the sample. We find that a number of emerging markets exhibit time-varying integration. Some markets appear more integrated than one might expect based on prior knowledge of investment restrictions. Other markets appear segmented even though foreigners have relatively free access to their capital markets. While there is a perception that world capital markets have become more integrated, our country-specific investigation suggests that this is not always the case.