Industry factors and partial capital market integration

Abstract

The topic issue of international capital market integration has been subject to intensive examination since early 1980s. Unlike the conventional studies assuming either a perfect market integration or a perfect market segmentation, recent studies have centered their focus on measuring the (partial) degrees of market integration and on the time-varying nature of market integration corresponding to the progress of market liberalization. Some new studies went further to develop either conceptual and/or theoretical frameworks to investigate the causes of partial market integration. In this study, we attempt to contribute to this newly emerging topic literature in two areas. First we expand the Bekaert and Harvey's study ( 1995) to examine the impacts of industrial factors on the level of integration; and second we use a multi-factor GARCH-M as well as a State- Space model to estimate the time varying market integration parameters for the expanded model. We find that the mean levels of integration between the overall Taiwanese stock market and the stock markets from the US tend to be high, with substantial variations over time. For individual industries, we find that the levels of their integration with the US markets vary. We do find a higher integration for those industries that engage in international activities, such as electronic and computer industries. For those industries that are local oriented, such as automobile, tourism, and cement industries, they are not much integrated with the world market. The same estimation procedure has been applied to other Asian capital markets to examine their integration with the U.S. markets. Again we find that their levels of integration with the US markets vary across markets and across time. It should be an interesting topic for future studies to examine into the causes of the time-varying capital market integration and variations of integration across financial markets.