Abstract
In the chapter, we discuss some problems associated with international asset pricing. Indeed, investors from different countries face different investment and consumption opportunities. Thus, international models should make assumptions regarding market integration and purchasing power parity (PPP). Then, we present some international extensions of the CAPM and assess the pricing error when the investor uses the domestic CAPM to price assets while his market in not strictly segmented. Finally, we use a partial integrated international CAPM to investigate the evolution of the market integration degree of a Latin American emerging market (Mexico) into the world market.
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Notes
- 1.
If \( I_k^c \) is the price level in country k expressed in the local cuurency, then \( I_k^c = {I_k} \times {S_k} \); where \( {S_k} \) is the nominal exchange rate which measures the price in the local currency of one unit of the reference currency. Thus, \( \frac{{dI_k^c}}{{I_k^c}} = \frac{{d{I_c}}}{{{I_c}}} + \frac{{d{S_k}}}{{{S_k}}} + \frac{{d{I_c}}}{{{I_c}}} \times \frac{{d{S_k}}}{{{S_k}}} \) and, \( \pi_k^c \cong {\pi_k} + \frac{{d{S_k}}}{{{S_k}}} \)
- 2.
Equation (8.7) holds for the market portfolio, then \( {\delta_m} \) can also be interpreted as the world market risk.
- 3.
See Stulz (1995) for further details and discussions.
- 4.
A quick look at Fig. 8.1 shows evidence of mean-shift in the dynamics of estimated integration measure.
- 5.
The estimated coefficient \( {\hat \mu_j} \) measures the average integration degree in the regime j.
- 6.
The hypothesis of no break versus an unknown number of changes given a maximum number of breaks M for m is tested.
- 7.
For the application of the testing procedure, see Bai and Perron (2003).
- 8.
Similar results were obtained using the US T-bill as a proxy of the risk-free rate.
- 9.
- 10.
These dates are illustrated in Fig. 8.1. They are precisely estimated since the corresponding confidence intervals cover a few months before and after.
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Arouri, M.E.H., Jawadi, F., Nguyen, D.K. (2010). Dynamics of Market Integration and International Asset Pricing. In: The Dynamics of Emerging Stock Markets. Contributions to Management Science. Physica-Verlag HD. https://doi.org/10.1007/978-3-7908-2389-9_8
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DOI: https://doi.org/10.1007/978-3-7908-2389-9_8
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