© 1995 International Bank for Reconstruction and Development / The World Bank
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Emerging Stock Markets and International Asset Pricing
Elaine Buckberg is with the Western Hemisphere Department at the International Monetary Fund. She thanks J. Joseph Beaulieu, Andrew Bernard, Tasneem Chipty, Stijn Claessens, Rudiger Dornbusch, Raul Livas Elizando, Stanley Fischer, Campbell Harvey, John Heaton, Ruth Judson, Charles Kramer, Paul Krugman, Mark Stone, Aaron Tornell, and the M.I.T. International Breakfast and Money Lunch groups for helpful discussions. Several anonymous referees and seminar participants at Brandeis University, the Brookings Institution, the Congressional Budget Office, the Federal Reserve Bank of New York, the Federal Reserve Board, the International Monetary Fund, the Massachusetts Institute of Technology, RAND Corporation, and the World Bank Conference on Portfolio Investment in Developing Countries, Washington, D.C., September 9–10, 1993, provided useful suggestions. Peter Tropper, of the IFC'S Emerging Markets Group, and James Poterba generously provided data, and a National Science Foundation Graduate Fellowship provided financial support for this research.
This article investigates whether emerging stock markets are now part of the global financial market and characterizes return behavior in these markets. Tests of the conditional International Capital Asset Pricing Model (ICAPM) reveal that eighteen of the twenty largest emerging markets were integrated with the world market between December 1984 and December 1991, but that many of the same markets reject the model when data for 1977–84 are used. These results suggest that large capital inflows from industrial economies, beginning in the late 1980s, caused prices in emerging markets to reflect covariance risk with the world portfolio, thus inducing their consistency with the ICAPM.
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