The Journal of Finance

Time‐Varying World Market Integration

Published: 06/01/1995   |   DOI: 10.1111/j.1540-6261.1995.tb04790.x

GEERT BEKAERT, CAMPBELL R. HARVEY

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.

Foreign Speculators and Emerging Equity Markets

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00220

Geert Bekaert, Campbell R. Harvey

We propose a cross‐sectional time‐series model to assess the impact of market liberalizations in emerging equity markets on the cost of capital, volatility, beta, and correlation with world market returns. Liberalizations are defined by regulatory changes, the introduction of depositary receipts and country funds, and structural breaks in equity capital flows to the emerging markets. We control for other economic events that might confound the impact of foreign speculators on local equity markets. Across a range of specifications, the cost of capital always decreases after a capital market liberalization with the effect varying between 5 and 75 basis points.

Expectations Hypotheses Tests

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00371

Geert Bekaert, Robert J. Hodrick

We investigate the expectations hypotheses of the term structure of interest rates and of the foreign exchange market using vector autoregressive methods for U.S. dollar, Deutsche mark, and British pound interest rates and exchange rates. We examine Wald, Lagrange multiplier, and distance metric tests by iterating on approximate solutions that require only matrix inversions. Bias‐corrected, constrained VARs provide Monte Carlo simulations. Wald tests grossly overreject the null, Lagrange multiplier tests slightly underreject, and distance metric tests overreject. A common interpretation emerges from the small sample statistics. The evidence against the expectations hypotheses is much less strong than under asymptotic inference.

Characterizing Predictable Components in Excess Returns on Equity and Foreign Exchange Markets

Published: 06/01/1992   |   DOI: 10.1111/j.1540-6261.1992.tb04399.x

GEERT BEKAERT, ROBERT J. HODRICK

The paper first characterizes the predictable components in excess rates of returns on major equity and foreign exchange markets using lagged excess returns, dividend yields, and forward premiums as instruments. Vector autoregressions (VARs) demonstrate one‐step‐ahead predictability and facilitate calculations of implied long‐horizon statistics, such as variance ratios. Estimation of latent variable models then subjects the VARs to constraints derived from dynamic asset pricing theories. Examination of volatility bounds on intertemporal marginal rates of substitution provides summary statistics that quantify the challenge facing dynamic asset pricing models.

Diversification, Integration and Emerging Market Closed‐End Funds

Published: 07/01/1996   |   DOI: 10.1111/j.1540-6261.1996.tb02709.x

GEERT BEKAERT, MICHAEL S. URIAS

We study a new class of unconditional and conditional mean‐variance spanning tests that exploits the duality between Hansen‐Jagannathan bounds (1991) and mean‐standard deviation frontiers. The tests are shown to be equivalent to standard spanning tests in population, but we document substantial differences in the small sample performance of alternative tests. Our empirical application examines the diversification benefits from emerging equity markets using an extensive new data set on U.S. and U.K.‐traded closed‐end funds. We find significant diversification benefits for the U.K. country funds, but not for the U.S. funds. The difference appears to relate to differences in portfolio holdings rather than to the behavior of premiums in the United States versus the United Kingdom.

The Term Structure of Real Rates and Expected Inflation

Published: 04/01/2008   |   DOI: 10.1111/j.1540-6261.2008.01332.x

ANDREW ANG, GEERT BEKAERT, MIN WEI

Changes in nominal interest rates must be due to either movements in real interest rates, expected inflation, or the inflation risk premium. We develop a term structure model with regime switches, time‐varying prices of risk, and inflation to identify these components of the nominal yield curve. We find that the unconditional real rate curve in the United States is fairly flat around 1.3%. In one real rate regime, the real term structure is steeply downward sloping. An inflation risk premium that increases with maturity fully accounts for the generally upward sloping nominal term structure.

International Stock Return Comovements

Published: 11/25/2009   |   DOI: 10.1111/j.1540-6261.2009.01512.x

GEERT BEKAERT, ROBERT J. HODRICK, XIAOYAN ZHANG

We examine international stock return comovements using country‐industry and country‐style portfolios as the base portfolios. We first establish that parsimonious risk‐based factor models capture the data covariance structure better than the popular Heston–Rouwenhorst (1994) model. We then establish the following stylized facts regarding stock return comovements. First, there is no evidence for an upward trend in return correlations, except for the European stock markets. Second, the increasing importance of industry factors relative to country factors was a short‐lived phenomenon. Third, large growth stocks are more correlated across countries than are small value stocks, and the difference has increased over time.

The Global Crisis and Equity Market Contagion

Published: 08/11/2014   |   DOI: 10.1111/jofi.12203

GEERT BEKAERT, MICHAEL EHRMANN, MARCEL FRATZSCHER, ARNAUD MEHL

We analyze the transmission of the 2007 to 2009 financial crisis to 415 country‐industry equity portfolios. We use a factor model to predict crisis returns, defining unexplained increases in factor loadings and residual correlations as indicative of contagion. While we find evidence of contagion from the United States and the global financial sector, the effects are small. By contrast, there has been substantial contagion from domestic markets to individual domestic portfolios, with its severity inversely related to the quality of countries’ economic fundamentals. This confirms the “wake‐up call” hypothesis, with markets focusing more on country‐specific characteristics during the crisis.

Global Growth Opportunities and Market Integration

Published: 05/08/2007   |   DOI: 10.1111/j.1540-6261.2007.01231.x

GEERT BEKAERT, CAMPBELL R. HARVEY, CHRISTIAN LUNDBLAD, STEPHAN SIEGEL

We propose an exogenous measure of a country's growth opportunities by interacting the country's local industry mix with global price to earnings (PE) ratios. We find that these exogenous growth opportunities predict future changes in real GDP and investment in a large panel of countries. This relation is strongest in countries that have liberalized their capital accounts, equity markets, and banking systems. We also find that financial development, external finance dependence, and investor protection measures are much less important in aligning growth opportunities with growth than is capital market openness. Finally, we formulate new tests of market integration and segmentation by linking local and global PE ratios to relative economic growth.