MARKET INTEGRATION AND INVESTMENT BARRIERS IN EMERGING EQUITY MARKETS

This article develops a return-based measure of market integration for nineteen emerging equity markets. It then examines the relation between that measure, other return characteristics, and broadly defined investment barriers. Although the analysis is exploratory, some clear conclusions emerge. First, global factors account for a small fraction of the time variation in expected returns in most markets, and global predictability has declined over time. Second, the emerging markets exhibit differing degrees of market integration with the U.S. market, and the differences are not necessarily associated with direct barriers to investment. Third, the most important de facto barriers to global equity-market integration are poor credit ratings, high and variable inflation, exchange rate controls, the lack of a high-quality regulatory and accounting framework, the lack of sufficient country funds or cross-listed securities, and the limited size of some stock markets.