Ines Chaieb

Do Implicit Barriers Matter for Globalization

Market liberalization may not result in full market integration if implicit barriers are important. We test this proposition for investable and non-investable segments of twenty-two emerging markets (EMs). We also measure the degree of integration for six major developed markets (DMs) as a meaningful benchmark. We find that while the DMs are close to fully integrated, both EM segments are not effectively integrated with the global economy. We quantify the importance of implicit barriers and show that better institutions, stronger corporate governance, and more transparent markets in EMs would jointly contribute to a higher degree of integration by about 20% to 30%. The Author 2013. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.

Exchange Risk and Market Integration

We investigate the impact of currency factor on market integration. We compare integration indices estimated from international asset pricing models with and without real exchange risk. The theoretical expectation implies the integration measures should be similar when global currency premium and the sum of global and local currency premiums are small. Our empirical results support this proposition. We also examine the sensitivity of the Pukhthuatong and Roll (2009) R square to omitted currency factors. In general, currency risk does not affect the level and the dynamics of the integration measure except under crisis conditions.

The Unconditional and Conditional Exchange Rate Exposure of U.S. Firms

We re-examine the relationship between exchange rate movements and firm value. We estimate the exchange rate exposure of publicly listed U.S. firms clustered into eleven industries. Using a panel approach, we uncover statistically significant and sizable unconditional exposure. We also examine the dynamics of exchange rate exposure modeled as a function of business cycle indicators and firm characteristics. We find that exposure varies over time with macroeconomic and financial variables and increases during economic contractions. Deviations from the unconditional measure of exposure driven by the macroeconomic variables are economically meaningful.

Integration of Sovereign Bonds Markets: Time Variation and Maturity Effects

We examine time varying integration of developed (DM) and emerging (EM) market government bonds. Although we find an upward trend for most countries and maturity bands, we do observe reversals and negative trends among both DMs and EMs and for some maturities during the financial crisis. We examine potential factors that could explain the integration of the long vs. the short maturity bond segments and show that enhanced institutional quality, higher credit quality and better future investment opportunities would jointly contribute to a higher integration of the long vs. the short maturity bonds by about 15%.

Is Exchange Risk Priced Beyond Intertemporal Risk

Recent conditional tests show that exchange risk is priced in integrated international markets. However, these results are typically obtained assuming that intertemporal risk does not matter. We test an intertemporal international asset-pricing model where the investment opportunity set is dynamic. Using a conditional orthogonalization approach, we investigate whether the exchange risk is priced once the market and intertemporal risks are fully taken into account. We find that, in addition to the market and intertemporal risks, the exchange risk is an important determinant of risk premium. We also find that the intertemporal risk, which is often overlooked in the literature, is priced.

Time-Varying Risk Premia in Large International Equity Markets

We use an estimation methodology tailored for large unbalanced panels of individual stock returns to address key economic questions about the factor structure, pricing performance of factor models, and time-variations in factor risk premia in international equity markets. We estimate factor models with time-varying factor exposures and risk premia at the individual stock level using 62,320 stocks in 46 countries over the 1985-2018 period. We consider market, size, value, momentum, profitability, and investment factors aggregated at the country, regional, and world level. We find that adding an excess country market factor to world or regional factors is sufficient to capture the factor structure for both developed and emerging markets. We do not reject asset pricing restriction tests for multifactor models in 74% to 91% of countries. Value and momentum premia show more variability over time and across countries than profitability and investment premia. The excess country market premium is statistically significant in many developed and emerging markets but economically larger in emerging markets.We use an estimation methodology tailored for large unbalanced panels of individual stock returns to address key economic questions about the factor structure, pricing performance of factor models, and time-variations in factor risk premia in international equity markets. We estimate factor models with time-varying factor exposures and risk premia at the individual stock level using 62,320 stocks in 46 countries over the 1985-2018 period. We consider market, size, value, momentum, profitability, and investment factors aggregated at the country, regional, and world level. We find that adding an excess country market factor to world or regional factors is sufficient to capture the factor structure for both developed and emerging markets. We do not reject asset pricing restriction tests for multifactor models in 74% to 91% of countries. Value and momentum premia show more variability over time and across countries than profitability and investment premia. The excess country market premium is statistically significant in many developed and emerging markets but economically larger in emerging markets.

Is Liquidity Risk Priced in Partially Segmented Markets

We develop a new global asset pricing model to study the joint impact of liquidity and investability constraints for 42 markets. On average, developed and emerging market stocks that can only be held locally are associated with an extra premium of 2.23% and 11.43%, attributed to liquidity level premium (LLP) of 1.06% and 2.39% and unspanned local market risk premium (LMRP) of 1.17% and 9.04%, respectively. While LLP and LMRP are two channels affecting the pricing of segmented stocks, they are differentially related to measures of information quality, sentiment, ownership, short selling, insider trading, and funding and market conditions.We develop an asset pricing model to analyze the joint impact of liquidity costs and market segmentation. The freely traded securities command a premium for liquidity level and global market and liquidity risk premiums whereas securities that can only be held by a subset of investors additionally command a local market and liquidity risk premiums. Based on a new methodology, we find that the liquidity level premium dominates the liquidity risk premiums for our sample of 24 emerging markets. Whereas the local liquidity risk premium is empirically small, the global market liquidity risk premium dramatically increases during crises and market corrections.

Do emerging markets provide currency diversification benefits

We examine the role of emerging markets in providing currency diversification benefits. We use global sectoral portfolios for developed and emerging markets. Our empirical tests based on a conditional international asset pricing model show that on average the prices of currency risks are very close to zero but they increase significantly during crisis periods. We find that the currency exposures and risk premia are lowest for the G7 portfolios augmented with a small set of eight emerging markets over most of the time period for almost all sectors. Finally, holding a most diversified portfolio of developed and emerging markets may not provide additional benefits.