RIEB Discussion Paper Series No.2020-32

RIEB Discussion Paper Series No.2020-32


Bilateral Integration Measures and Risk Attitudes in Large Stock Markets


This paper examines whether developed markets are more internationally integrated than emerging markets. A new bivariate regime switching model is constructed in order to take into account both international integration regime and segmentation regime, capture the endogenous and interactive effects between large markets, and pay attention to the economic structure of the price of variance risk. We estimated such regime switching model for 24 large stock markets and the US market as a reference market. That is, the regime reflects whether each of the 24 markets is integrated with the US. As a result, the structures of representative investor's risk attitude, or that of the price of variance risk, in each of the following 15 markets are almost the same; Canada, France, Italy, Australia, Hong Kong, Netherlands, Spain, Sweden, Switzerland, Brazil, South Korea, Taiwan, Indonesia, Mexico and Saudi Arabia. In such markets, these "international integration measures" defined as the (smoothed) probability of international integration regime are on average high, declining before the 2008 global financial crisis, but rising again after the crisis. This means that non-home-biased strategies such as an international diversification have advantages over home-biased strategies such as a domestic concentration except just before the crisis. In addition, the difference between the international integration measures of developed and emerging markets included in these markets is extremely small. In other words, being an emerging market does not mean that the market is segmented. Summing up the above results, it can be concluded that the international diversification is strongly recommended in these markets regardless of country or period.


Graduate School of Business Administration, Kobe University,
Junior Research Fellow, Research Institute for Economics and Business Administration, Kobe University