We extend the Pukthuanthong and Roll (2009) measure of integration to provide an estimate of systemic risk within international equity markets. Our measure indicates an increasing likelihood of market crashes. The conditional probability of market crashes increases substantially following increases of our risk measure. High levels of our risk measure indicate the probability of a global crash is greater than the probability of a local crash. That is, conditional on high levels of systemic risk, the probability of a severe crash across multiple markets is larger than the probability of a crash within a smaller number of markets.

We propose a novel risk measure that relates to subsequent negative conditional stock market returns. Our risk measure considers both the fragility and stress of the market. Fragility is measured by the Fragility Index developed by Berger and Pukthuanthong (2012) and market stress is based on several economic variables. Results show that incorporating both market stress and fragility improves the information content of a risk measure. Our risk measure relates to poor subsequent monthly market returns. We show the risk measure contains predictive information in a purely ex-ante specification.

Economists have long recognized the importance of information veracity in valuing risky securities. Market participants concerned about the credibility of information measures may require additional compensation to entice them to hold stocks with less transparent information. These same securities are expected to display greater sensitivities to measures of market sentiment. We find that investor sentiment sensitivities increase directly with multiple measures of opacity in the cross-section. Next we examine the extent to which sentiment sensitivities are priced in an asset pricing context. Using the Jha et al. (2009) model of conditional performance evaluation, we find an inverse relation between ex ante known investor sentiment and the marginal performance of opaque stocks. In contrast, translucent stocks exhibit relatively little variability in performance across levels of sentiment.

We provide an analysis of frontier market equities with respect to world market integration and diversification. Principal component results reveal that frontier markets exhibit low levels of integration. In contrast with developed and emerging markets, frontier markets offer no indication of increasing integration through time. Furthermore, individual frontier market countries do not exhibit consistent rates of changing integration. Structural break tests identify breakpoints in integration, as well as integration dynamics across countries. We show that frontier markets have low integration with the world market and thereby offer significant diversification benefits.