International asset pricing models suggest that barriers to portfolio flows and availability of market substitutes affect the degree and time variation of world market integration. We use GARCH-in-mean methodology to assess the evolution in market integration for eight emerging markets over the period 1977–2000. Our results suggest that while local risk is still a relevant factor in explaining time variation of emerging market returns, none of the countries appear to be completely segmented. We find that there are substantial crossmarket differences in the degree of integration. The evolution toward more integrated financial markets is apparent although at times we do observe reversals. In addition, we provide clear evidence on the impropriety of directly using correlations of market-wide index returns as a measure of market integration. Finally, financial market development and financial liberalization policies play important roles in integrating emerging markets.

This paper conducts empirical tests in a conditional setting for 10 developed and 12 emerging markets to determine whether emerging market currency risk is priced and if it spills over into developed market assets. Our empirical model is based on real exchange rate measures and it allows currency risk to compete with broader economic and political risks. We find that emerging market currency risk is priced separately from other local risk factors and that it represents a significant component of equity returns in both developed and emerging markets. We also find that the spillover impact is heightened during emerging market crisis episodes and affects the expected compensation for global risks.