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Integration Level of Equity Markets in APEC's Emerging

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Integration Level of Equity Markets in APEC's Emerging Integration level of equity markets in APEC’s emerging countries: Are emerging markets regionally or globally integrated? Authors: Cynthia Ho Szee Yah Dinh Thi Quynh Anh Supervisor: Per Nilsson Student Umeå School of Business Autumn semester 2010 Master thesis, two-year, 30 hp Integration level of equity markets in APEC’s emerging countries: Are emerging markets regionally or globally integrated? Anh Dinh Cynthia Ho Abstract Supported by the investment barriers removal, financial deregulation and improved macroeconomic policies during the last three decades, the process of financial integration in those markets, emerging markets in general and emerging markets within Asia Pacific Economic Cooperation (APEC) in particular, has been pro-actively accessed these days. Moreover, recent trend in globalization in many APEC countries and especially in the emerging markets has triggered a stronger financial integration progress across countries. Nevertheless, it is surprising to find that these countries not only benefited from regional financial integration but also experienced global financial integration in the same period. Markets over the last two decades, which have been highlighted by financial crises occurred among those APEC emerging countries in the early of the year 1997, have raised political, social and economic questions. One of prominent questions among them: “Are emerging markets in APEC regionally or globally integrated?” has raised our interest in measuring the integration level in these countries. Our thesis paper, therefore, seeks to answer the question on the degree of financial integration level in nine APEC emerging countries. Collecting stock indexes from the Chile (Santiago Stock Exchange), China (Shanghai Stock Exchange), Indonesia (Indonesia Stock Exchange), Malaysia (Bursa Malaysia), Mexico (Mexican Stock Exchange), Philippines (Philippines Stock Exchange), Peru (Lima Stock Exchange), Russia (RTS Russian Stock Exchange), Thailand (Thailand Stock Exchange), we compute empirically the integration scores for these nine countries. We then compare the level of global financial integration and regional financial integration for each market during the examined time. Results of this study indicate that our nine sampling countries integrated in different levels. Not surprisingly when we conclude that the financial integration degree of those countries has not been stable over time due to various objective reasons that we also examine through our literature review for individual market. Keywords : emerging countries, APEC, global financial integration, regional financial integration. ACKNOWLEDGEMENT This piece of research is a product of two students in four months after one and a half year studying master degree at Umeå University. We are very grateful to our supervisor; Dr. Per Nilsson gave us his guidance and his professional pieces of advice in order to help us produce this thesis timely and efficiently. This thesis would not have been possible unless Thomas Lagoarde-Segot, PhD, our lecturer for the course on Emerging Markets Finance in France, indirectly formed the ideas from his course to the completion of this project thesis. To all our lecturers in Umeå University, we highly appreciate your kind support, your precious knowledge, your encouragement, and your enthusiastic attitude towards us so that we could apply all the knowledge we gained from you into our thesis. We would like to send our special thanks to Mr Abhineet Kaul, consultant of Frost & Sullivan, for his experienced advice and great help during the time of writing this thesis. Furthermore, we wish to acknowledge the support to all our student friends in USBE, in particular the library of Umeå University where we could access a huge source of information in order to finish this thesis. We owe our deepest gratitude to our families: our fathers, our mothers, our sisters and our brothers for their invaluable support, unflinching encouragement and unconditional love. It is please to thank to our thesis partner for keeping each other motivated and working hard together with the same goal during the last two years. Last but not least, we would like to send our gratefulness to Swedish government and Umeå University. Without the support on tuition fee, a very good chance for us to approach one of the best educational systems in the world remains in our dream. And without this great help, this thesis and our master degree achievement are hardly to be done. Table of Contents CHAPTER 1- Introduction .................................................................................................... 1 1.1 Background ..................................................................................................................... 1 1.2 Research Question ........................................................................................................... 2 1.3 Research Objective and Purpose ...................................................................................... 2 1.4 Rationale for the Study .................................................................................................... 3 1.5 Disposition of Dissertation .............................................................................................. 4 CHAPTER 2- Conceptual Issues/Literature Review .............................................................. 5 2.1 Financial Integration Concept .......................................................................................... 5 2.2 Integration Approaches ................................................................................................... 6 2.2.1 The Law of One Price ............................................................................................... 6 2.2.2 The term structure of interest .................................................................................... 7 2.2.3 Capital Asset Pricing Model (CAPM) ....................................................................... 7 2.2.4 Black Scholes ........................................................................................................... 8 2.3 Impacts of Financial Integration: Risks and Benefits ....................................................... 8 2.4 Dimension of financial market integration ..................................................................... 11 2.4.1National, Regional and Global ................................................................................. 11 2.4.2 Full market segmentation, Mild Market Segmentation and Full Market Integration . 12 2.5 The Determinants of financial Market Integration ......................................................... 14 2.5.1 Market attributes ..................................................................................................... 14 2.5.2 Economic Fundamentals ......................................................................................... 15 2.5.3 World information .................................................................................................. 15 2.6 The Development of APEC Market Integration ............................................................. 15 2.7 Equity Market Integration Situation in Emerging Countries ........................................... 18 2.8 APEC Emerging Equity Markets ................................................................................... 20 2.8.1 Chile (Santiago Stock Exchange) ............................................................................ 21 2.8.2 China (Shanghai Stock Exchange) .......................................................................... 23 2.8.3 Indonesia (Indonesian Stock Exchange) .................................................................. 25 2.8.4 Malaysia (Bursa Malaysia) ...................................................................................... 27 2.8.5 Mexico (Mexican Stock Exchange) ......................................................................... 30 2.8.6 Philippines (Philippines Stock Exchange) ............................................................... 32 2.8.7 Peru (Lima Stock Exchange) ................................................................................... 34 2.8.8 Russia (RTS Russian Stock Exchange) ................................................................... 36 2.8.9 Thailand (Thailand Stock Exchange) ....................................................................... 40 2.9 General measurement of market integration ................................................................... 45 2.9.1 Price-based measures .............................................................................................. 46 2.9.2 Quantity based measures ......................................................................................... 46 2.9.3 Regulatory and institutional measures of financial integration ................................. 46 2.10 Akdogan and Barari Approach .................................................................................... 47 2.10.1 Akdogan’s Approach (1996, 1997)........................................................................ 47 2.10.2 Extended methodology by Mahua Barari (2004) - A time-varying analysis ........... 48 2.10.3 Empirical results from previous studies ................................................................. 49 CHAPTER 3- Research Methodology ................................................................................. 54 3.1 Background ..................................................................................................................
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