Market Integration and Investment Barriers in Emerging Equity Markets

This paper develops a return-based measure of market integration for 19 emerging equity markets. It then examines the relationship between that measure, other return characteristics and investment barriers broadly defined. Although the analysis is exploratory in nature, some clear conclusions emerge. First, global factors account for a small fraction of the time-variation in expected returns in most countries, and global predictability has declined over time. Second, the emerging markets exhibit differing degrees of market integration with the U.S. The differences are not necessarily associated with direct barriers to investment. For instance, I do not find a significant link between return characteristics and ownership restrictions. 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 and/or cross-listed securities, and the limited size of some stock markets.