Market Integration and International Asset Allocation

45 Pages Posted: 7 May 2003

See all articles by Nuno Fernandes

Nuno Fernandes

University of Navarra, IESE Business School; European Corporate Governance Institute (ECGI)

Date Written: April 2003


During the last two decades, liberalization of capital markets caused an increased responsiveness to world factors. Indeed, as argued in this paper, emerging markets are now behaving like certain developed markets asset classes. This study develops a framework for asset classes comparisons in an increasingly integrated world market, focusing on two aspects - diversification benefits and risk profiles. The set of tools used includes the mean-variance analysis, spanning tests, the International CAPM, lower-moment CAPM and a conditional asset pricing model which allows for time-varying risk. The empirical analysis shows that after allowing investment in several developed market asset classes, there are no significant gains from an aggregate investment in emerging market equities. Furthermore, the mean variance spanning test shows that emerging markets as a whole are spanned by developed market indices. These results contrast with previous studies, and can be justified by the increasing integration of emerging markets, broader definition of the benchmark portfolio, and a longer (and more realistic) time frame. Also, this study provides one important investment implication. It advises against indexing strategies in emerging markets.

Keywords: Emerging Markets, Market Integration, Globalization, Spanning Tests, International Diversification, Conditional Asset Pricing

JEL Classification: G11, G12, G15

Suggested Citation

Fernandes, Nuno, Market Integration and International Asset Allocation (April 2003). Available at SSRN: or

Nuno Fernandes (Contact Author)

University of Navarra, IESE Business School ( email )

Avenida Pearson 21
Barcelona, 08034

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels

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